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A slowdown in world growth: what does that mean for the euro zone?

1 October 2015, Wealtheon

Written by Hans-Peter van Wersch

We are currently seeing an economic slowdown, both in emerging markets and in China. To compensate for its weak domestic economy, the euro zone will become even more dependent on exports to the United States and the United Kingdom.

Euro zone leaders are counting on a weak euro and strong worldwide growth to stimulate exports, as well as inflation to compensate for the weakness in domestic demand. How likely is this outcome? China will certainly not go into a recession, but there is no doubt that China will be experiencing a period of much slower growth. Virtually all of the emerging markets will also become weaker, on one hand as a result of their dependence on China, but also as a consequence of slow growth in productivity. As a result, the decision by the US Federal Reserve not to raise official interest rates for the time being is a welcome one: an increase in the interest rate could have led to a further exodus of capital from emerging markets. However, there is no doubt that the world economy is having a difficult time – and that this also threatens the moderate economic recovery currently underway in the euro zone.

In the first six months of 2015, the euro zone had a trade surplus of € 125 billion, whereas in the same period of 2011 there was a deficit of € 17 billion. In the past four years, exports have grown by 18 per cent, compared with an increase in imports of just 2 per cent. The effect on economic growth of having a net export situation (i.e. exports minus imports) is enormous. Between the first half of 2011 and the first half of 2015, the euro zone economy grew by 1 per cent. Without the rise in net exports, the economy in the euro zone would have shrunk by 1.3 per cent. To sum up, without an increase in worldwide growth, there would have been no recovery in the euro zone.

The increasing trade surplus in the euro zone does not come from trade with China or other emerging markets, but from trade with developed countries, particularly English-speaking countries and countries producing commodities. Only 7 per cent of the increase in exports from the euro zone in the past four years can be attributed to China. Almost half of the rise comes from an increase in trade with the US, the United Kingdom and Canada. Falling prices for oil and other commodities have reduced the value of imports from commodity-producing countries, thus creating an increase in net exports from the euro zone with these countries. By contrast, net exports to China over this period have been negative, given the fact that the value of exports from the euro zone to China have risen less than the value of imports from China.

Nevertheless, the euro zone will certainly experience the consequences of the slowdown in growth in China and the emerging markets. Emerging markets represent more than one-quarter of exports from the euro zone and these exports will come under pressure as a result of the rising competitive power of emerging markets, fuelled by their falling currencies. Net exports from the euro zone with these economies, especially China, will then weaken further. The question is whether the US and the United Kingdom can offset this slowdown in the emerging markets for the euro zone.

Both the American and the British economies continue to grow relatively steadily and investors remain optimistic about these markets. However, this makes the euro zone highly vulnerable to a slowdown in growth in the US and UK, which themselves are also not immune from a slowdown in global growth.

In the meantime, there are few signs that domestic demand in the euro zone will rise sufficiently to generate any robust growth. Domestic demand has increased over the past year, driven by lower inflation and energy prices, which have provided a temporary rise in income. This is however a one-off boost. Additionally, there are no signs of any increase in investments in the euro zone as a whole. Government investments are not increasing (partly as a result of this) and businesses are also adopting a wait-and-see attitude.

The highest priority is focused on the euro zone concentrating on stimulating domestic demand. The euro zone cannot continue to rely on a weak euro and a strong worldwide economy to compensate for its weak domestic economy. In view of the fact that the euro zone by this is vastly dependent on external events, the euro zone itself – as the worlds second-largest economic region – constitutes a major obstacle to the development of the world economy.

In the wake of two particularly good investment years and in the light of the growth developments set out above, we remain cautious when it comes to allocating our available liquidities to the equity markets. This despite our moderately positive judgment on equities. Our preference goes to developed countries, in particular the US, the United Kingdom and, to a lesser extent, the euro zone. 


Macroeconomics

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