Europe Still Recovering

By Georgios Tsapouris, investment strategist at Coutts

Corporate confidence in the eurozone declined slightly in February but continues to indicate expansion. The composite purchasing managers’ index (PMI) edged lower to 52.7, but remains comfortably in expansion territory, i.e. above 50. This is consistent with recent growth figures and lending surveys, which all point to continuing economic recovery and support our overweight stance on Europe ex-UK equities and peripheral European bonds.

Activity seems to be improving and the eurozone economy grew in the fourth quarter of 2013 by 1.1% over the prior quarter on an annualised basis. With the exception of Greece, the weaker peripheral states have now emerged from recession – Italy returned to growth after languishing in recession for more than two years (nine quarters of contraction).

Also encouraging was the relatively strong growth of 1.2% posted by France, despite weak PMIs, which fell to 47.6 while Germany’s most recent survey rose to 56.1.

The recent European Central Bank (ECB) survey of bank lending also provided encouragement that credit growth could turn positive this year. The survey has improved significantly since the depths of the eurozone crisis and banks tightened their lending last quarter only marginally.

However, every silver lining has a cloud and the improving activity removes some of the pressure on the ECB to act now against inflation, which remains dangerously low.

We expect the ECB to do the right thing and provide more monetary support eventually, but it may now take longer before it acts. Even if the ECB doesn’t cut rates at its next meeting, European equities and peripheral bonds remain well supported by the continued recovery.