Is Europe headed into another recession?
Europe’s industrial production fell last month, after falling the previous month. Unemployment is stuck at almost 12%. Credit is contracting. Two-year German government bonds have negative yields. Short-term interbank rates are already negative. Even as the US appears to be accelerating, Continental Europe looks like it’s running out of gas.
This is important. The Euro-zone is almost 20% of the world’s economy—bigger than China. From BMWs to Pirelli Tires to Hotel Sofitel, their goods and services compete with the best. If Europe rolls over, the US economy can’t help but slow. And we don’t need to slow down right now. The Fed has been moving towards normal a more normal policy, with an economy stuck in second gear.
Part of the reason Europe seems to be burning out is that their economy wasn’t very much on fire. After the Great Recession they had another pullback from 2011 to 2013. If they tip over again it will be their third recession in six years. But their central bank is limited in what it can do. They can’t expand the money supply the way the Fed has. So their monetary policy has been tighter than ours, and their inflation lower. But their growth has also been more tentative.
A downturn in Europe won’t pull our economy into a recession. But it sure won’t help.
Douglas R. Tengdin, CFA
Chief Investment Officer
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