European Economy

The Comeback Kings

Skyscrapers at sunset, City Centre, Warsaw, Masovian Voivodeship, Poland, Europe
In Warsaw and across most of the continent, the only way is up. Source: Getty images

Europe has turned from sick man of the world economy into an engine of global growth thanks to a recovery in domestic consumption that is now spreading to export industries across the 40-nation continent including Turkey and Russia.

“The European recovery is strengthening and broadening appreciably,” the International Monetary Fund wrote in its latest Regional Economic Outlook. It has revised up its forecast for the continent by half a percentage point to 2.4 percent in 2017 from the last projection in April. It also raised its forecast for the euro zone by half a point to 2.1 percent.

After years of income declines, the euro zone’s 600 biggest companies increased their net earnings by a third to €200 billion ($233 billion) in the first half of 2017. Increasing orders and optimistic forecasts by company leaders point to a 40 percent rise in earnings for the full year.

“Companies are barely managing to keep up with increasing demand,” said Chris Williamson, chief economist at British financial data specialist Markit which surveys 5,000 companies in Europe. Recruitment is at a 10-year high.

Eurostat, the EU’s statistics body, last week said euro-zone growth was accelerating to its highest level in a decade. At last, the recovery is also boosting the labor markets of the nations hit hardest by the debt crisis — unemployment is falling everywhere, including in Spain, Portugal and even Greece.

“I expect a sustainable economic recovery in the coming four years.”

Marcel Fratzscher, president, DIW economics institute

Business sentiment is even improving even in Italy, whose chronically weak growth and debt-laden banking sector have long been worrying economists and European officials.

The Ifo institute’s business climate index for the euro zone, an important leading indicator, has hit a new record which points to stable growth continuing well into 2018.

“I expect a sustainable economic recovery in the coming four years because the economic output of the euro zone today is hardly any bigger than before the global financial crisis 10 years ago,” Marcel Fratzscher, president of the DIW economic research institute, told Handelsblatt.

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The rapid recovery is enveloping all countries and industries. French building giant Saint Gobain recently reported sharp growth in the French construction business and in neighboring countries. Automakers Daimler and Fiat Chrysler as well as chemicals firms like BASF and Air Liquide are also reporting strong expansion in their markets.

Germany’s export-reliant industries are among the greatest beneficiaries because they sell half their output in Europe on average. At auto giant VW, the percentage is 60 percent.

In Germany’s blue chip DAX stock index, Daimler, auto components supplier Continental, healthcare group Fresenius, Deutsche Telekom, national carrier Lufthansa, Volkswagen, sports equipment group Adidas and BASF have all raised their forecasts for 2017. The last time Germany saw such an abrupt rise in confidence across different industries was in 2009 after the recession that followed the financial crisis.

“After years of stagnating corporate earnings there’s a new momentum,” said Christian Kahler, chief equity strategist at DZ Bank. He predicted that the 30 companies listed in the DAX index will earn €90 billion this year; that’s more than ever before and up €30 billion from last year.

Germany’s mechanical engineering sector, a key industry that makes machines and employs more than one million people, illustrates the speed of the recovery. At the start of 2017 the industry’s association predicted growth of 1 percent this year but in the summer radically raised that forecast to 3 percent thanks to a flood of orders from European countries like Spain, Italy and France that have given the sector the strongest push in 5 years.

But for all the euro zone’s new-found strength, it is eastern Europe that’s enjoying the strongest growth. Poland, the only EU country that got through the 2008/2009 financial crisis without sliding into recession, is outpacing all the big EU members with projected growth of 4.1 percent in 2017 and 3.4 percent in 2018, according to the European Bank for Reconstruction and Development.

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The economies of Romania and Latvia are expanding even faster. Eastern Europe’s average export growth of 7 percent has even overtaken China’s 4-percent growth.

With unemployment falling rapidly, the shortage of skilled workers in the region is so dramatic that VW’s budget auto unit Skoda is considering relocating production of its premium model Superb from Kasiny in the Czech Republic to Emden in northern Germany.

And with incomes rising and skilled labor running out, it’s gotten to the point that the region needs to shift its business model from a system based on low-income export industries to one that produces high-quality goods and services catering for domestic consumers, economists said.

Despite Europe’s new-found strength, many economists are warning that the recovery could tail off from mid-2018 and that Europe must work off a backlog of reforms to strengthen its resilience to further shocks.

“Further reforms are required for a lasting recovery especially in southern European countries and Italy in particular,” said the president of the Ifo institute, Clemens Fuest. Europe’s high levels of government debt made it vulnerable to future financial crisis, he said.

The IMF called on the euro zone to complete its banking union and deepen the integration of its capital markets. It said the euro zone needed a “fiscal capacity,” a statement that indirectly backed reform proposals by French President Emmanuel Macron who has called for a standalone budget for the bloc. It also called for the strict implementation of common budgetary rules, which chimes with the German government’s mantra.

Even Holger Bingmann, the head of the BGA Federation of German Wholesale, Foreign Trade and Services, has his doubts about how long the recovery will last. “As much as we’re happy about Europe’s economic recovery, it also remains vulnerable to setbacks in view of lingering competitive weaknesses and a lack of reform vigor in many places,” he said.

Handelsblatt’s Donata Rieel covers politics from Berlin. Ulf Sommer writes about companies and markets for Handelsblatt. To contact the authors: riedel@handelsblatt.com, sommer@handelsblatt.com

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