If you have young children or grandchildren, you may have read “Alexander and the Terrible, Horrible, No Good, Very Bad Day” by American author Judith Viorst. Well, that’s what last week was like on the European continent from an economic perspective.
Hopes of economic recovery were put on hold when gross domestic product (GDP) figures across the region showed no – nada, zero, zip – growth overall during the second quarter of 2014. First quarter’s growth (0.2 percent) hadn’t been all that impressive either, but at least it was headed in the right direction. The strongest second-quarter performers were Netherlands, Spain, and Portugal, according to The Economist. However, some of Europe’s largest economies (Italy, Germany, and France) contracted during the period.
Geopolitical unrest prompted the Euro area’s poor showing. Turmoil in the Middle East, violence in Ukraine, and sanctions against Russia have, among other things, led to a slowdown in demand for luxury goods that has negatively affected European economies. After delivering strong performance in 2013, the MSCI Europe Textiles, Apparel, & Luxury Goods Index was down more than 10 percent in the month of July and down 4.75 percent for the year. China’s anti-bribery and corruption campaign also has reduced demand for luxury goods, according to Bloomberg.
The Euro area’s economic growth (or recent lack thereof) has sparked fears of deflation in the region. The Economist offered this insight:
“Deflation would be particularly grave for the Euro area because both private and public debt is so high in many of the 18 countries that share the single currency. Even if inflation is positive, but stays low, it hurts debtors as their incomes rise more slowly than they expected when they borrowed. If deflation were to set in, the effects would be worse still; when prices and wages fall, debts, which do not shrink, become harder to repay.”
Woes across the Atlantic put a shine on markets in the United States, according to Reuters. Major U.S. stock markets finished the week ahead and benchmark U.S. treasury yields finished the week at a 14-month low.
The U.K economy grew by 3.2% in the second quarter compared with the same period last year, slightly higher than the original 3.1% estimate. The Bank of England are showing no signs of risking killing off the recovery, by raising interest rates, anytime soon. With interest rates tied to age growth it is likely that the first rise in interest rates will be delayed until next year.