While the Eurozone economy has not suffered a blow as a result of the Brexit vote, economic uncertainties in its largest economies, namely Germany and France, continue to show that the world’s biggest economic region continues to sputter. This opens up the window on a number of time-sensitive investing opportunities.
Eurozone Economy Continues to Look Gloomy
The Eurozone economy has not been cobbled by the Brexit vote as many thought it would. However, that does not mean the Brexit vote will be good for the Eurozone economy.
At the same time, Europe’s two biggest economies, Germany and France, continue to show signs of slowing down. This could undermine investor optimism and the economic outlook for the Eurozone in 2017.
In August, the Ifo Business Climate Index fell by the most in four years. The key indicator, which is published monthly, fell to 106.2 points from 108.3 in July. Analysts were expecting the index to climb to 108.5. Business sentiment in France, the second-largest economy in the Eurozone, also slipped in August.1
Not surprisingly, second-quarter gross domestic product growth (GDP) in the Eurozone was underwhelming at just 0.3% and confirms the slowdown. This figure is half of the 0.6% GDP increase in the first quarter. Germany reported second-quarter GDP of 0.4% with Spain at 0.7% and the Netherlands at 0.6%. At the other end of the spectrum, though, France and Italy reported zero growth.2
Uncertainty over the long-term impact of Brexit is partly to blame for the poor results, but so too is weak retail sentiment. This does not bode well for the Eurozone in the third quarter. Nor does it suggest conditions will improve in the fourth quarter either.
IMF Lowers Economic Outlook for Eurozone
The outlook for the Eurozone is also bleak according to the International Monetary Fund (IMF). The fund cut its 2016 growth forecasts for the Eurozone to 1.6% and just 1.4% in 2017.3
The agency had previously forecast GDP growth of 1.7% for both years but downgraded its outlook after the Brexit vote on June 23, in which the U.K. voted to leave the European Union.
Again, there is more to worry about when it comes to the Eurozone economy than just the Brexit vote. Other risks that could undermine the Eurozone economy even further include broader issues with trade: the strong U.S. dollar, sustained weak growth and inflation, global economic uncertainty (Japan, China, U.S., and South America), and broader geopolitical tensions.
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- “German Ifo business climate unexpectedly drops in August,” NASDAQ, August 25, 2016; https://www.nasdaq.com/article/german-ifo-business-climate-unexpectedly-drops-in-august-cm670004.
- “German Economic Growth Beats Expectations but Remains Subdued,” The Wall Street Journal, August 12, 2016; https://www.wsj.com/articles/german-economy-grew-faster-than-expected-in-second-quarter-1470984392.
- “Uncertainty in the Aftermath of the U.K. Referendum,” Internal Monetary Fund, July 19, 2016; https://www.imf.org/external/pubs/ft/weo/2016/update/02/pdf/0716.pdf.
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