Eurozone growth surprised many analysts in the final quarter of 2022 by avoiding recession, but there is a hidden issue which will impact investment returns from the region, according to Axa Investment Managers Eurozone economist.
Hugo Le Damany said Eurozone growth could expect to receive a further boost in the coming months, with gas prices having fallen by about 80 per cent.
But he says one issue which is relevant to advisers and their clients is the nature of the growth, which is mostly coming from strong exports. But that domestic consumption actually fell materially during the period.
He said: “Limited details published at the country level indicate that headline growth was supported by net trade while domestic demand was significantly down, especially private consumption.”
He said in France, which had a positive GDP growth number overall, domestic consumption fell by 1.7 per cent, while in Spain domestic consumption fell by 0.9 per cent, despite the overall economy expanding.
Ben Laidler, global market strategist at eToro, said depending on exports for growth rather than on consumption would present a problem since global economic growth has slowed.
This may mean the benefit to Eurozone GDP that accrues from selling to other countries is diminished as demand in those economies diminishes.
Laidler added that the impact of higher interest rates may not already have been felt on domestic consumption levels as there is typically a lag of between 9 and 12 months between rates rising or falling, and this being felt in the real economy.
Le Damany is another who is cautious on the growth outlook for the Eurozone.
He said: “On a sequential basis, we struggle to foresee strong growth ahead, more like a muddle through. In fact, the ECB Q4 2022 bank lending survey already shows a significant deterioration in loan demand for both firms’ investment and housing activities.
"On the bright side, further normalisation in supply chain disruptions may bring temporary support, while China reopening from Covid-19 is a net positive although it may distort the growth picture in the short run.”
But Tom Hopkins, portfolio manager at BRI Wealth Management was more optimistic.
He said: “The slowdown in the European economy is clearly being exacerbated by a fall in real household incomes as the energy crisis starts to bite. We believe the outlook has brightened in recent weeks, thanks to benign winter weather, which had reduced gas demand coupled with the end of China’s zero-Covid policy.
"Whilst recession in Europe is still on the cards for some point in 2023, it’s likely to be much shallower than originally feared.”
Sandra Holdsworth, head of rates at Aegon Asset Management, says she expected interest rates to continue to rise in the Eurozone in the coming months, something else which could potentially negatively impact the level of consumption in the economy.
david.thorpe@ft.com
