Wednesday, May 16, 2012

European Economies Refuse To Cooperate With Bearish Forecasts

If you were only to read the financial press, and watch the plunging prices on European stock markets, you could easily reach the conclusion that Europe is in the depths of a major economic recession.

But data released yesterday tell a different story.

Helped by a robust German economy - which grew at +0.5% in the first quarter, or 5 times greater than expected - euro zone economic growth in the first quarter was flat overall.

There were some countries that showed significant slowdowns - especially Italy, whose economy contracted by -0.8% during the first quarter - but the yesterday's data surprised pundits and analysts with a resiliency that belied the euro bears.By comparison, the U.S. economy rose by 0.5% in the first quarter.

Now, to be sure, flat economic growth is hardly cause for champagne.  On the other hand, the data suggests that corporate Europe is doing better than expected.

Here's how the New York Times described the results this morning:

Still, along with growth in Germany that was much better than expected, the data provided mild respite from the gloom that has pervaded Europe in recent days. Despite the figures, major stock indexes retreated Tuesday in Europe, and Spanish and Italian bond yields, or interest rates, edged up on news that those two countries’ economies continued to contract. Indexes in the United States, however, were modestly higher in afternoon trading. 

The euro zone, by not slipping into recession in the first quarter of 2012, ran counter to expectations. Growth in the region was zero compared to the previous quarter, according to the figures, from Eurostat, the E.U. statistics agency. 

So here's the continued conundrum that frankly puzzles me.

Yes, the euro has serious structural issues.  And, yes, it is possible that Greece will be forced to leave the euro block (even though the Greek economy grew in the first quarter as well).

But the simple truth for now at least is that European stock markets are trading at valuation levels that are at 10-year lows despite the fact that business in general continues to grow above expectations.