Europe Stocks Plummet After Barcelona Attacks

European stocks continued to trade deep into the red on Friday as investors reacted to Spain's worst terror attack in more than 13 years. The pan-European Stoxx 600 was down 0.75% during early afternoon deals with all sectors and major bourses in negative territory.

In Madrid, the IBEX 35 dropped 1.1% to 10,327, and had fallen by as much as 1.7% in early trade, as all but two components were lower. The Stoxx Europe 600 index fell 1% to 3763.30.                              

“Recent data point to the broadest synchronized upswing the world economy has experienced in the last decade,” International Monetary Fund chief economist Maurice Obstfeld wrote in a recent blog post.

“World trade growth has also picked up, with volumes projected to grow faster than global output in the next two years.” The pick-up has been paced by budding rebounds in Europe and Japan, two economies that until now had been seen as drags on the global economy.

  Building Momentum

After years of lackluster growth, the eurozone economy is starting to build momentum. The expansion accelerated to 0.6% in the second quarter, and it’s more evenly spread across the 19-nation region than in the past.

The Netherlands posted the strongest data in a decade and Italy, long a slouch in the region, may see the best performance since 2010 this year.

That’s good news for European Central Bank President Mario Draghi, who wants to make sure the recovery is well established before reining in stimulus.

Inflation is still undershooting the ECB’s goal and there’s little sign of significant wage gains as yet. That’s allowing Draghi to take his time in scaling back support for the region’s economy. A 4% annualized surge in Japanese GDP in the second quarter put the nation in an unexpected spot: at the top of the growth table among the Group of Seven industrial economies.

  Taming Inflation

Low inflation—it’s fallen short of forecasts for five straight months—means there’s little pressure on the Federal Reserve to act forcefully to rein in the recovery, even with unemployment at a 16-year low.

“The Fed has no reason in my view to act aggressively to tighten monetary policy,” William Dudley, president of the Federal Reserve Bank of New York, told the Associated Press in an August 14 interview.

In China, a multi-year slowdown has stabilized, with economists forecasting an expansion of 6.7% this year. The IMF increased its estimate for the nation’s average annual growth rate through 2020—to 6.4% from 6%—while warning that it would come at the cost of rising debt that increases medium-term risks to growth.

Of course, there’s always the chance that something could happen to upset the worldwide expansion, from an outbreak of hostilities between North Korea and the US to a sudden swoon in financial markets as central banks scale back their support.

Yet for now at least, the global economy is on a “positive trajectory”, said Bloomberg Intelligence chief economist Michael McDonough.”There’s a pretty good foundation to build on for the next year or so.”

While the unexpected strength in Europe and Japan is providing fuel for the global upswing, the expansion’s fate ultimately rests on the performance of the world’s two biggest economies, the US and China. And there the omens are favorable.