Europe Shows Strength as U.K., German Indicators Top Forecasts
European regulators are testing 91 banks
Hannelore Foerster/Bloomberg
European Central Bank president Jean-Claude Trichet.
European Central Bank president Jean-Claude Trichet. Photographer: Hannelore Foerster/Bloomberg
July 23 (Bloomberg) -- Amit Kara, an economist at UBS AG, talks about about the rise in the U.K.'s gross domestic product during the second quarter. The U.K. economy grew almost twice as much as economists forecast in the second quarter in the fastest expansion for four years as rebounding services, manufacturing and construction ignited the recovery. Kara speaks with Andrea Catherwood on Bloomberg Television's "The Pulse." (Source: Bloomberg)
July 23 (Bloomberg) -- Germany's Deputy Finance Minister Steffen Kampeter says that his country is committed to supporting troubled banks and that he's "bullish" on the U.S. economy. Bloomberg's Sara Eisen reports. (Source: Bloomberg)
The British economy grew at the fastest pace in four years in the second quarter and German business confidence surged to a three-year high this month, indicating Europe’s recovery may be stronger than forecast.
U.K. gross domestic product rose 1.1 percent in the three months through June, almost twice as fast as the 0.6 percent gain predicted by economists in a Bloomberg News survey, the Office for National Statistics said in London today. In Munich, the Ifo institute said its business climate index, based on a poll of 7,000 executives, jumped to 106.2 this month, confounding expectations of a decline.
The reports suggest two of Europe’s largest economies are being buoyed by slides in the pound and the euro just as factories step up production to meet global demand. At the same time, government efforts to cut budget deficits and a weakening U.S. economy may damp European growth, while publication of bank stress-test results today could weigh on market sentiment.
“Europe is coming in relatively strong, stronger than expected,” said Laurent Bilke, an economist at Nomura International Plc in London. “It’s unlikely we’ll sustain this level for long.”
The euro rose against the dollar, reversing earlier losses, and the pound also gained. The euro climbed 0.4 percent to $1.2945 at 10:56 a.m. in London, while sterling climbed 1 percent to $1.5410.
Double-Dip Scenario
Today’s indicators may help ease concern among investors that the world economy is veering back into recession.
“The latest data are reducing the risk of double-dip recession,” European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said today in San Sebastian, Spain. “The first indicators for July, for example, are quite positive.”
Economists expected Germany’s Ifo gauge to fall from June’s 101.8. The increase capped a week in which reports showed growth in Europe’s services and manufacturing industries unexpectedly accelerated this month and European consumer confidence also improved.
Germany’s Bayerische Motoren Werke AG, the world’s largest luxury carmaker, on July 13 raised its 2010 sales and earnings forecast. Its rival Daimler AG, the second-largest luxury car manufacturer, increased its full-year forecast last week after second-quarter profit beat analysts’ estimates.
‘Strong’ Investment
“Manufacturing is doing extremely well, economic growth is strong and sustainable, driven by strong impulses from exports to emerging markets,” said Jens Kramer, an economist at NordLB in Hanover. “Germany is strong in investment goods and investment cycles are going up.”
The Bundesbank forecasts German growth of 1.9 percent this year and 1.4 percent in 2011. The International Monetary Fund predicts the British economy will expand 1.2 percent this year and 2.1 percent next.
Rebounds in services, manufacturing and construction ignited the U.K.’s recovery in the second quarter after the economy grew 0.3 percent in the first. That pickup may sharpen the divide among policy makers as the Bank of England considers whether the economy faces a greater threat from inflation or needs more stimulus to avert another recession.
The nation is enduring the deepest budget squeeze since World War II while facing a debt crisis in the euro region, its biggest trading partner. In the U.S., Federal Reserve Chairman Ben S. Bernanke said this week that the outlook for growth is “unusually uncertain.”
‘Encouraging Sign’
“It’s a very encouraging sign that the recovery is establishing itself, strengthening and broadening,” said Neville Hill, an economist at Credit Suisse Group AG in London and a former British Treasury official. “Looking forward, the issue is not so much what’s happening inside the U.K. but outside it. This is more than strong enough to withstand the kind of fiscal tightening we’re going into.”
The U.K.’s Office for Budget Responsibility, the government’s new fiscal monitor, said last week that the coalition government’s spending cuts have increased the chance the economy may plunge back into recession.
German Chancellor Angela Merkel last month unveiled an 81.6 billion-euro ($105.6 billion) program of budget cuts and revenue-raising measures.
European regulators are also testing 91 banks to examine whether they can withstand a shrinking economy and a drop in government bond values. Governments are counting on the tests on firms including Frankfurt-based Deutsche Bank AG to reassure investors about the strength of the financial system and the amount of state support lenders may need. The results are due to be published at 6 p.m. today Frankfurt time.
Interest Rates
The fiscal and banking strains may leave central bankers having to maintain record low interest rates.
Bank of England officials have become more pessimistic even with a benchmark rate of 0.5 percent. It is “likely” the budget measures “pushed down a little on the most likely path for output,” they said in minutes of the July 8 decision released yesterday. “Considerable uncertainties remained” because of the euro-region debt crisis, they said.
ECB President Jean-Claude Trichet wrote in today’s Financial Times that a “credible medium-term fiscal consolidation strategy” should now be pursued by all industrialized countries. Doing so would help stabilize and sustain growth, he said.
Elsewhere in Europe, Italy’s Isae Institute reported today that an index of consumer confidence unexpectedly rose to 105.6 from 104.4. Still, household spending in France fell 1.3 percent in June from the previous month, conflicting with a forecast for a gain of 0.3 percent, the Paris-based Statistics Office said.
To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Christian Vits in Frankfurt at cvits@bloomberg.net
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