Eurozone Economy Heating Up

Europe’s economy has revved up this year, and that’s good news for US multinationals that rely heavily on exports, and for the high-flying American stock market.

But some economists say growth in the 19-nation eurozone has topped out and may be at a crossroads as the European Central Bank moves toward a likely phaseout of its massive stimulus program beginning early next year, Fox Business reported.

“Europe’s growth has probably peaked,” says IHS Markit economist Raj Badiani. That doesn’t mean the region’s recovery is petering out but it likely suggests slower growth over the next few years, economists say.  That, in turn, could pose another hurdle for a US stock market that some analysts believe is overvalued.

“We do think it’s a little bit of a risk” for stocks, says David Bianco, chief US investment strategist for Deutsche Asset Management.

ECB President Mario Draghi may hint at the central bank’s plans in a speech Friday at the US Federal Reserve’s annual symposium in Jackson Hole, Wyo. Some economists, however, say Draghi will steer clear of any discussion of monetary policy on fears of roiling markets.

“I would be surprised if he says anything of note,” Badiani says.

The eurozone economy grew at an annual rate of 2% the first three months of the year and 2.5% in the second quarter following a 1.7% expansion last year. The International Monetary Fund projects growth of 2.1% in 2017, which would be the fastest pace since 2007.

The US and its corporations are benefiting from the region’s good fortunes as eurozone consumers and businesses buy more American products. US exports surged at a nearly 11% annual rate early in the year before slowing to a roughly 3% gain in the second quarter.  

Meanwhile, earnings for Standard & Poor’s 500 companies jumped 11% in the April-June period. S&P 500 companies derive about 15% of their profits from Europe but the share for some sectors, such as technology firms, is much higher, Bianco says.

American companies are gaining both from more robust European demand and a euro that has strengthened against the dollar as the eurozone economy improves and the ECB prepares to nudge interest rates higher.  A weaker dollar makes US goods less expensive for eurozone customers and allows US firms to realize fatter profits when they convert euros to dollars. The euro has risen about 12% vs. the dollar this year.