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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (39871)	7/9/2003 12:01:30 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 71911

Growth in Core Europe to Remain Sub-Par - July 2, 2003 by Stephen S. Poloz, Vice-President and Chief Economist -------------------------------------------------------------------------------- The European economy appears to have stalled yet again, after showing some promise in the first half of 2002. This sluggish stop-go pattern is likely to continue for several years. Some of the problems Europe faces are short-term in nature. The European economy stopped in its tracks during the winter, as high oil prices and geopolitical uncertainty took their toll. The situation has been compounded by the sudden return of the euro to more normal levels. This combination of forces has led most forecasters to reduce the Euro-Zone’s growth outlook for 2003 to below 1%, when 2% seemed feasible only a few months ago. Europe should end 2003 on a stronger footing, with growth returning to 2% or so for 2004. Although fiscal policy is largely constrained from providing new stimulus, the European Central Bank has cut rates by 125 basis points since late last year. Consumer confidence and spending apparently began to rebound after the conclusion of the Iraq war. Also, the easing of geopolitical uncertainty should put investment spending back on track. Nevertheless, it is clear that core Europe will remain on a modest growth track even after global conditions normalize. Consumers will remain wary as companies restructure, and companies will invest cautiously, given the need to rebuild their balance sheets. Meanwhile, the decision to expand the European Union by another 10 members means that new investment today is much more likely to go to the fertile accession economies, dragging down growth in core Europe. Adding those 10 new countries into the picture today boosts the forecasted 2003 growth rate for the future European Union by about 0.5%, because growth will be much higher in the accession countries. This is exactly why European companies will invest there. A similar outward flow of investment contributed to Japan’s stagnant growth in the past 10-15 years – but even as Japan’s economy has struggled, her investments in developing Asia have performed spectacularly well. The fly in the ointment is the euro, which has risen more than 30% from its lows. This move, while faster than anyone expected, should have been anticipated in long-range business plans. What matters now is how European producers respond – will they attempt to raise export prices, and risk losing the business? Or, will they accept a narrower profit margin for now, keep their customers, and make new investments to reduce costs? Our assessment is that the second approach is more likely – that is how American exporters handled the excessively strong U.S. dollar during 1998-2000, and U.S. productivity soared. It is hard to believe that the recent rise in the euro can devastate the European economy all by itself – to do so is to wonder why the European economy was not booming during the past two years, when the currency was so low. The bottom line? Core Europe will not make a major contribution to the global economy this year or next, but it will not be a drag on global growth, either. Peripheral Europe will lead in growth and the euro will remain strong, a combination that will foster continuous restructuring in core Europe. Stephen S. Poloz Vice-President and Chief Economist Export Development Canada spoloz@edc.ca