Once Lagging Euro Region Outstrips World on Wave of Liquidity

Europe Is on the Verge of a Cyclical Upturn: Marinov

The euro-area economy is riding the biggest wave of liquidity since the birth of the single currency to its fastest expansion in four years.

The long-term laggard of global growth is for now even outpacing the U.S as it cashes in on ultra-loose monetary policy, weakness in the euro and oil prices, fading fiscal austerity, surging stocks and renewed bank lending. Barclays Plc reckons such forces make overall monetary and financial conditions the easiest since the euro began trading in 1999.

Credit for the revival, mere weeks after talk was rife of deflation, is due in part to European Central Bank President Mario Draghi’s successful navigation of German opposition to quantitative easing. As always, the risk is of slippage, with Greece the chief wild card as its clash with creditors throws doubt over its membership of the 19-nation bloc.

“I’m really optimistic,” said Gilles Moec, chief European economist at Bank of America Merrill Lynch and a former Bank of France official. “We’ve had a number of false starts in the European recovery, but this time the recovery has legs.”

Moec raised his 2015 euro-area growth forecast on Friday to 1.6 percent from 1.5 percent, and predicted 1.9 percent in 2016 after a string of data reinforced the reasons for optimism. The International Monetary Fund lifted its forecast last month, paving the way for the European Commission to revise up its outlook when it makes new predictions next week.

Deflation Averted

Consumer prices have ended a four-month run of declines, German unemployment continues to fall and Spain’s once crisis-addled economy grew the fastest in seven years in the first quarter. Economic confidence across the continent is near its highest since mid-2011.

So well has 2015 begun that the euro-area may have beaten the U.S. for the first time in four years. The region grew 0.4 percent in the first quarter from the previous three months, according to economists polled by Bloomberg, faster than the 0.1 percent estimated for the U.S.

Investors are tuning in. A survey of financial professionals by Bloomberg found them favoring Europe as the best place to put their money for the first time since at least 2009, displacing the U.S.

That raises the likelihood that the Stoxx Europe 600 Index will extend its 15 percent gain so far this year and the euro’s drop to dollar parity that some were predicting won’t happen.

Bond Selloff

Signs of a revival led the euro to climb the most in April in 4 1/2 years, while a revolt against negative bond yields by investors such as Bill Gross wiped 142 billion euros ($160 billion) off the region’s government bonds this week.

“European growth looks like its pretty good,” said Trevor Greetham, head of multi asset at Royal London Asset Management, which oversees the equivalent of $120 billion. “I wouldn’t be at all surprised if you see substantially higher bond yields by year-end.”

Hailed for driving the recovery is Draghi. After the ECB cut its benchmark interest rate to a record low last year and charged banks to park cash, it started a 1.1 trillion-euro bond-buying program. The QE program will “reinforce” the recovery, ECB Executive Board member Benoit Coeure said in an interview with the magazine Alternatives Economiques published on Tuesday.

Export Boost

Perhaps the biggest impact of looser monetary policy has been on the euro, which even after its recent gains is still more than 10 percent lower on a trade-weighted basis since a year ago. A cheaper currency is a boon for exporters such as Germany’s Continental AG. Europe’s second-biggest maker of car parts raised its 2015 sales forecast on Thursday as currency effects contribute to revenue.

A plunge in the price of oil since mid-2014 -- boosting spending power and cutting import costs -- and falling bond yields have added to the economic supports.

Even banks are stirring into life after shaking off the strains of recapitalizations and stress tests. Lending increased in March for the first time since 2012, ECB data showed on Wednesday.

Governments may also be assisting the recovery once again, having previously focused on cutting budget deficits. The fiscal stance for the euro area was neutral in 2014 and will remain broadly so through 2016, according to the IMF. Some authorities are also reaping the rewards of taking painful steps to overhaul their economies, among them Spain, which the government sees expanding 2.9 percent this year.

Where Next?

So will Europe’s recovery last or fizzle as it did after 2011? Over the course of the year, the IMF still predicts growth will only be half the rate of the U.S.’s 3.1 percent and that even next year inflation will be barely half the ECB’s goal of just below 2 percent.

Even ECB officials say the recent improvement is more cyclical than structural as they pressure governments to do more to make their economies more efficient. The IMF says the region’s speed limit or potential growth rate is just 0.7 percent, more than 1 percentage point lower than the U.S.

Unemployment above 11 percent also remains a drag, as does lackluster wage growth in many countries.

The biggest threat remains problem-child Greece as its negotiations with creditors over long-stalled reforms and aid drag on. The impasse has renewed doubts over whether it will remain in the euro and or whether a so-called Grexit will occur, infecting the region.

“The markets seem complacent at the moment about the risk of contagion to other euro-zone countries and I think business and consumer sentiment would take a big hit,” said Jennifer McKeown, an economist at Capital Economics Ltd. in London.

On the upside, Prime Minister Alexis Tsipras told his Cabinet on Thursday that he’s confident a deal is close after he decided to take a bigger role in the talks. There is also the argument that bigger financial firewalls, the ECB’s QE and stronger growth elsewhere leave the euro region better placed to weather any loss of Greece.

“The euro zone is now -- after three years of getting ready for it -- ready to deal with any fallout from Greece, even though we don’t expect it to exit,” said Christian Schulz, an economist at Berenberg Bank. “The euro zone is going to continue to do well this year, next year and beyond.”

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