In Short: More growth from Europe

08-15-2017

Growth in Europe accelerated during this year’s second quarter, with gross domestic product among the 19 eurozone countries expanding by 0.6%—an annualized pace of 2.3%—versus 0.5% in the first quarter. Over the past 18 months, the region has grown a little faster than the U.S. after being well behind for years. 

The improvement is especially evident in France, which is experiencing a macroeconomic revival. The result of long-term economic and political stagnation, France lagged eurozone rivals such as Germany the past five years, with unemployment remaining stubbornly above 10%. Now there are indications of a turnaround, with the jobless rate falling to 9.6% in the first quarter as the country captured some of the eurozone’s stronger growth. Insee, the French statistics agency, predicts the country’s GDP will grow 1.6% in 2017—the fastest pace since 2011.

The obvious catalyst is France’s new president, Emmanuel Macron, who has made further liberalization of the labor market a central component of his economic agenda. Currently, Macron’s government is vigorously pursuing a series of reforms that will give private employers more flexibility over employment regulations while creating more job-training opportunities.

The encouraging economic news from France was underscored by Italy, which announced accelerated industrial output in June, pointing to a potentially stronger-than-expected recovery. Production increased 1.1% from May and, on an annualized basis, industrial output rose 5.3%. At the same time, Italy’s employment rate expanded even as the government ended a tax incentive for companies that agreed to hire on a permanent basis. Further, gross nonperforming loans among Italy’s banks fell 5% month-over-month in June. As a result, the Bank of Italy revised its 2017 GDP forecast upward from 0.9% to 1.4%.

Based on these encouraging macro numbers, it appears that southern Europe—which includes France, Italy and Spain, the continent’s second-, third- and fourth-largest economies, respectively—is on the verge of a meaningful economic recovery. This bodes well for investors seeking opportunity and diversification outside the U.S.