EURONOMICS: Turning Mkt Lemons To Lemonade On 2H Growth
By Brian Blackstone
Of DOW JONES NEWSWIRES
PARIS (Dow Jones)--Economists and euro-zone officials dug in their heels in
the latest tug-of-war with financial markets Thursday, insisting that the
region is still on track for a strong rebound in the second half of the year.
Yet the latest business sentiment figures suggest that activity remains
uneven, with France carrying an increasing share of the growth burden, while
Germany shows few signs of recovery.
France's manufacturing sentiment index increased one point in June to 102,
its highest level since June 2001. The gain was triggered by a two-point rise
in the global orders index and a six-point surge in orders from overseas.
"The recovery in order books, notably in capital equipment, shows that
investment should progressively join consumption and inventories as engines of
growth for France," said Marc Touati, chief economist at Natexis Banques
Populaires in Paris.
After expanding at a 0.4% quarterly pace between January and March, France
will likely grow 0.6% in the second quarter and 0.7% in the third, said
Stephane Deo, economist at UBS Warburg in Paris.
That's in line with Finance Minister Francis Mer's contention Thursday that
growth should reach about 2.5% on an annualized basis by the end of the year.
Until recently, the type of self-feeding rebound still expected for France
was the outlook for the whole euro zone. But continued German weakness puts
that scenario at risk.
Reflecting the gap between the euro zone's two biggest economies, the German
Ifo business sentiment index fell in June, confounding expectations for a
slight rise.
And Germany's plant and machinery industry posted its weakest monthly result
in new orders so far this year in May, the industry association VDMA said
Thursday. New orders for plant and machinery were down a real 19% on the year.
"Shockingly bad," is how HSBC economist Robert Prior in London summed up the
German figures.
"It's not France that's pulling the entire region up but rather Germany
that's weighing on it," said Deo.
Germany Key To Outlook
Yet economists remain upbeat that Germany and the euro zone as a whole will
achieve better growth in the second half of the year, despite recent
developments in financial markets that would appear to weigh on activity.
The euro has risen steadily against the dollar in recent weeks, trading above
$0.99 Wednesday before moving back closer to $0.98 Thursday, which should weigh
on exports later this year.
"Germany is typically regarded as more export-oriented than France or Italy,
so any weakening of the export market would hit Germany particularly," said
Norman Williams, economist at Barclays Capital in London.
Nevertheless, Williams expects euro-zone growth to accelerate through the
rest of the year, with gross domestic product growing at quarterly rates of
0.7%, 0.5%, and 0.7% in the final three quarters of the year.
Williams expects to revise those estimates down due to recent financial
market trends, "but not in a major way."
Though the U.S. economic outlook has deteriorated in recent weeks - GDP
growth is now seen closer to 2% than 4% through the rest of the year after
rising 6.1% in the first quarter - recent equity market weakness hasn't
affected economists' expectations for the euro zone much.
They reason that since investment wasn't a main driver of growth, the absence
of an investment recovery won't damp it a lot either.
Mer said recent equity market weakness, which has weighed heavily on French
stocks, shouldn't derail France's expansion, noting that while "I can't say
that it's wonderful news," France is less sensitive to equities than the U.S.
is. For 2002, 3% growth is "not out of reach," he said.
HSBC's Prior expects France and Germany to converge at 3% annualized growth
rates in the second half of 2002. The euro zone as a whole should also expand
by 3% between July and December, he estimates.
"Equity markets aren't the only factor here," he said, noting that despite
feeble stock markets in the U.S., investment there may eke out a gain in the
second quarter, which should help the German machinery order numbers.
And the euro's rise has some positives too, like lower inflation and greater
household purchasing power, while any negative impact on exports shouldn't come
until next year.
The euro's rise "damps upward price pressure, through falling import prices,
and provides additional purchasing power which could boost domestic demand and
provide an additional stabilization for the German economy," Deutsche
Bundesbank President Ernst Welteke said Thursday. He conceded that Germany
still lags the euro zone's upswing.
Summing up the glass-half-full view of economists in the face of investors
who increasingly see the outlook as half empty, Prior said recent market
developments are "a net negative, but perhaps not as big as a lot of people
think."
-By Brian Blackstone; Dow Jones Newswires; 33-1-40-17-17-40;
brian.blackstone@dowjones.com |
