Ignacio de la Torre. Professor. IE Business School
28 February 2017
Europe rounded off 2016 with a higher level of growth than the US, something not seen for a decade. Moreover, Europe has more solid building blocks on which to build future growth.
Over a year ago I stated that Europe could surprise in terms of growth, and grow faster than the US. We recently heard that in 2016 Europe grew more than the US for the first time in almost a decade. Not by much, but more all the same. Hence the US closed the year with a meagre growth rate of 1.6%, while Europe managed 1.7%, following fourteen months of growth, something the US economy has not managed to do with its more volatile performance.
Pessimists, of which there are more than a few in Europe, will be quick to put a dampener on this news. They will state that: a) Europe is growing because of the ECB’s ultra-expansive monetary policy, while the US has had to face a rise in interest rates; b) European exports benefit from an artificially weak euro resulting from the ECB policy, as pointed out by Peter Navarro, appointed by Trump to head the US trade department; and c) the temporary weakness of oil prices up until November has also helped to generate greater growth.
The most optimistic outlook (I would venture to say that it is also quite realistic) could, on the other hand, argue that: a) with growth in levels of employment heading toward the maximum levels of nine years ago, unemployment in Europe has dropped to pre-2009 levels, which has brought about a progressive improvement in consumer levels, which in turn plays a key role in sustaining the European economy; b) salaries, which have risen very little since the crisis, have started to move upwards again, which has also contributed to improving consumer levels and bring added potential; c) difficulty in obtaining loans in the private sector has made growth difficult in recent years, but that turned positive last spring, gradually giving rise to more economic growth, in both homes and companies; d) Europe has, to date, weathered the terrible visions of Brexit pretty well; and e) Europe’s fiscal policy was more conservative than that of the US as a whole in 2016.
If Trump’s victory brought about so-called “reflation trade” in US markets, or rather, a greater conviction that there would be more growth in the short term and also greater inflation, this trend is now beginning to appear in European markets. Europe has recently seen how good economic figures (2 % annualized growth of GDP, the highest in six years, along with other leading performance indicators, composite PMI of 54.4, in other words 43 consecutive months of expansion, which gives a level of over 50) occurred in parallel with a higher level of prices (CPI at 1.8%, the highest in four years), allaying pessimists’ fears of a Japanese-style inflation scenario.
With regard to the future, I believe that Europe’s building blocks of recovery are more promising than those of the US. Hence, internal demand has more potential given higher levels of employment, investment levels seem to be growing more strongly in Europe than in the US, which is a sign of greater optimism, the real estate cycle shows greater potential, and Europe’s monetary policy continues to be more expansionary.
Looking at things philosophically, Europe will be tested by a semi-hostile Trump presidency, and will face key elections in France, Holland, Germany, and possibly Italy. My impression is that populism will be a loser in said elections, because, among other things, there is greater social cohesion in Europe, as seen in the evolution of inequality compared to the US, and based on that we should ask if an investor would feel safer under the leadership of politicians like Merkel, or a politician like Trump. This is an important question given that investments, when all is said and done, can make a marginal difference in growth levels of an economy.
It is certain that for Europe, which is currently one of the most successful export platforms in history, a movement toward protectionism could be harmful. Taking everything into consideration, talking about protectionism is one thing (it did, after all, cause the great depression of the 1930s) and another is to actually apply it.
As the great Churchill once said, “You can always count on Americans to do the right thing - after they've exhausted every other possibility."