It was not that long ago that the world questioned whether the European Union and its currency would survive. Portugal, Greece, Spain and even Italy appeared to be hovering on the brink of economic disaster. Europe was a basket case but today that assessment may be changing.
Let’s start with Great Britain. Although not a member of the EU, England boasts the world’s sixth-largest economy. The U.K. experienced a declining economy for five quarters in a row beginning in the second quarter of 2008. Through 2011 and 2012, when the Eurozone crisis was at its worst, the U.K. had no growth at all until the first quarter of this year when GDP grew by 0.3%. The second quarter was even better at 0.6%.
The IMF recently raised its forecast for the island nation to a growth rate of 0.9% for this year. Now, growth of less than 1% is no great shakes but it is the direction that counts. The same could be said for other parts of the European continent.
Manufacturing and data from Europe’s Purchasing Managers Index (PMI) taken altogether is at a 16-month high. PMI rose in all nations but Germany, while pricing pressures and input costs declined as well. July’s data saw yet another increase rising to 50.3 from June’s 48.8. A number above 50 signals growth ahead and it has not been at this level since July, 2011.
As you might expect, those countries that have suffered the greatest declines in growth such as Greece, Spain and Italy have had the largest rebounds. We are also beginning to see renewed export strength in these countries. For example, Spain saw exports soar in May ending 7.3% higher than the same time last year.
Unemployment is continuing to rise, although at a slower pace. Eurostat, a European economic research center, estimates that over 26 million workers in the 27 countries of the Euro zone are out of work. That equates to around 12.1% of the work force. The unemployment rate is still increasing in 17 of the member nations but declining in ten.
During Europe’s 2013 second quarter earnings season 54% of companies reported better sales (up from 50% last quarter) and 47% reported earnings growth, versus 42% last quarter. The Eurozone corporate sector appears to have reached a level where spending can no longer be put off if these companies want to continue to compete on a global footing. Value-added is at an all-time low. Plant and equipment is aging and needs to be modernized or at least replaced simply to maintain business activity at even this low level.
Europe appears to be stabilizing but economic growth is still at least a quarter or two away. Today, Europe is where the U.S. markets were back in 2008-2009. Valuations are much cheaper than on this side of the Atlantic, but I believe a turnaround in Europe is underway. For those who have patience and are willing to wait, European stocks are a good value.