Europe is hurting. But the continent’s debt and stagnation problems aren’t going to end soon.
Analysts don’t think the salve that’s being applied by the European Central Bank’s interest rate cuts and bond buying is strong enough medicine to heal long-festering ills.
“We suspect that last week’s measures will be insufficient to reduce greatly the risk of deflation or to bolster significantly the region’s faltering economic recovery,” said economist Michael Pearce of Capital Economics.
Economists fear that Europe could be headed the way of Japan, which has been dealing with deflation and repeated bouts of recession since the 1990s. In the months ahead, analysts expect large U.S. companies that depend on Europe for a good portion of their sales to report that profits are curtailed there.
France hasn’t grown for the past two quarters.
Italy has gone into recession for the third time since 2008.
Germany is being infected by weakness from its surroundings. The German economy declined 0.2 percent last quarter, in part because of recession in parts of Europe and also because of concerns over Russian aggression in Ukraine, particularly if more sanctions are imposed.
The European Central Bank has decided to fight the continent’s economic problems by lowering already-low interest rates, but low rates haven’t been helping. That’s not helping small and medium-size companies in countries such as France get the credit they need to grow.
“The economic data can hardly be any worse in France at the moment,” said economist Claus Vistesen of Pantheon Macroeconomics. “Something is fundamentally wrong with the economy’s engine room.”
While European economies have weakened considerably lately, their problems aren’t new. Analysts have criticized political leaders for dithering through the years rather than seriously working on the underlying debt, banking and structural problems.
Not that you would know it if you’d simply been watching European stock markets.
Until recently, the European Stoxx 600 index was climbing nicely, fueled by optimistic investors betting on a European recovery. The Stoxx 600 has climbed 5 percent in 2014 and 12.8 percent during the past 52 weeks.
The index plunged in August based on concerns over a potential recession and Russia’s behavior. But the index climbed as geopolitical concerns eased and investors began anticipating stimulus.
Investors tend to buy stocks whenever central banks are providing stimulus. The “Don’t Fight the Fed” motto has powered U.S. stocks in the Standard & Poor’s 500 index up about 200 percent since the lows of the recession in 2009.
In 2014, with economic data also pointing to a solid recovery, the S&P 500 has climbed 8.6 percent. It’s up about 19 percent in the past 52 weeks.
Although the national employment picture still shows weakness, analysts consider the U.S. economy the most solid now in a troubled global economy.
“U.S. data has been good, markedly better than that in the Eurozone or Japan,” said a Morgan Stanley report this week. The report predicted that U.S. unemployment will fall to 5.8 percent by the end of the year, noting purchases by businesses have been strong for 15 months, with commercial loan growth up 12 percent year over year.
“The U.S. is the region where things look most ‘normal,'” said Morgan Stanley’s report.
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Given that view, some analysts are suggesting that investors adopt a “no place like home” approach, sticking with stocks that depend on selling products and services in the U.S. rather than in Europe.
In a recent report, Goldman Sachs strategist David Kostin noted that U.S. gross domestic product is likely to remain above 3 percent for “several years while the Euro area expands at a rate below two percent.” In addition, he thinks the euro will fall by more than 20 percent while the dollar reaches parity by the end of 2017.
Consequently, he thinks U.S. companies with the highest European sales exposure will lag U.S.-centric companies. Among stocks that are 100 percent U.S.-focused, according to Goldman, are Discover Financial, Walgreen, Intuit, Macy’s, Pioneer Natural Resources, Aetna, Union Pacific and AT&T.
Companies heavily dependent on European sales include Coca-Cola, Mondelez, Abbott, Invesco, Solera Holdings, Priceline and Wabco Holdings, to name a few.
On Tuesday, McDonald’s reported disappointing worldwide sales, including a slump in Europe and even worse results in Asia. According to FactSet, about 40 percent of McDonald’s sales are in Europe.
Twitter @gailmarksjarvis