World Economy

Europe’s Growth Outlook Darkens

Europe’s Growth Outlook Darkens Europe’s Growth Outlook Darkens

Hints of investor optimism in Europe were snuffed out this week, as the darkening economic outlook registered across the continent and sent stocks and credit markets sliding.

While market turmoil at the start of this year was sparked by a selloff in commodities and Chinese stocks, the reality of Europe’s own woes hit home as companies reported dismal earnings, and policy makers and institutions lined up to cut economic forecasts and warn of further risks, Bloomberg reported.

The European Commission cut its prediction for 2016 growth in the 19-nation bloc to 1.7% from 1.8% and said the largest economies of Germany, France and Italy will all perform worse than predicted just three months ago. While the European Central Bank may spur into action again, moves in the euro and stocks suggest President Mario Draghi may be losing his ability to convince investors he can anesthetize the region from risks.

“Markets had a very rough start,” said Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich. “There’s only so much central bankers, even Draghi, can do. Each incremental dose probably has a lower impact than the previous one. The weaker-than-expected economic growth and the associated increased likelihood of a recession led to selling of risky assets.”

  Stocks Carnage

The blunt truth is that the eurozone is still struggling to recover nearly six years after it first bailed out Greece, while European leaders are trying to tackle their latest crisis and stem the inflow of refugees.

The doom and gloom nixed a nascent stock-market recovery in Europe, with a drop of 3.6% in the region’s shares this week almost completely erasing the rebound from the previous two. The losses have left the Stoxx Europe 600 Index down 9.9% this year, its worst start since 2008. It’s trading near its lowest valuation since July relative to a gauge of global equities.

Since the start of the year, no industry group has managed to escape the carnage. Banks and automakers plunged the most, down more than 18%. Credit Suisse Group AG sank to its lowest price since 1992 on Thursday after posting its biggest quarterly loss in seven years. Daimler AG fell to a more than one-year low after revising down expectations for 2016 sales because of slowing demand in China.

Analysts have grown more pessimistic about the earnings outlook for Stoxx 600 companies. They’ve slashed their profit-growth projection to 3.9% for this year, compared with 6.7% at the start of December.

  Losing Money

While European shares are getting battered more than stocks worldwide, most other markets aren’t faring much better. Globally, only 1% of equity fund managers avoided losses this year as a measure tracking volatility across asset classes surged to near its highest level since September.

Amid a run of dismal earnings, the financial credit risk of European banks and insurers has risen to the highest in more than two years. The cost of insuring subordinated debt climbed for a seventh day Friday, and reached the highest since July 2013, based on the Markit iTraxx Europe Subordinated Financial Index.

Policy makers aren’t having it any easier. Central bankers, battling low inflation and either feeble or imbalanced economies, highlighted “downside risks” to growth and laid the blame for the deteriorating outlook on external factors, including weaker oil prices, the slowdown in China and volatile markets.

  Darker Skies

The darker skies are reflected in economic data. Citigroup Inc.’s Economic Surprise Index for the eurozone dropped to its most negative reading since 2014 last week, meaning that reports have been weaker than forecast. A similar measure for the UK has been below zero since April of last year.

Expectations of more stimulus from the ECB have pushed the amount of government debt yielding below zero percent to more than $2.4 trillion, equating to about 38% of the Bloomberg Eurozone Sovereign Bond Index.

German two-year yields fell below minus 0.5% for the first time on Wednesday, and eight-year rates turned negative for the first time since April. As bonds climb, the meager yields are failing to attract investors at auctions. Germany didn’t reach its sales goal at the past three debt sales.