Europe: Slowly Winning the Inflation War

Written by: | July 27, 2018

Source: Bloomberg, July 26, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

THE BOTTOM LINE

  • Recent headlines on world trade underscore the interdependence of the world economy -- where growth depends on the economic success of each region as well as their trade with each other.
  • Europe’s persistent struggle to jumpstart growth was back in the headlines – via the recently announced tariff moratorium between the U.S. and the European Union. Six years ago, European Central Bank (ECB) President Mario Draghi famously said the ECB would do “whatever it takes” to bring the Eurozone back to financial health, and brought the bank’s benchmark deposit rate into unprecedented negative territory, where it remains to this day.
  • As of June, the strategy appears to be succeeding. Europe’s economy has been growing steadily – if slowly – as a combination of bailouts, bail-ins and oversight have helped the worst-off economies from collapse.
  • The most recent data show Eurozone Gross Domestic Product (GDP) grew at a year-over-year 2.5% rate in Q1 2018; inflation for Q2 came in at a 2% year-over-year rate, hitting the ECB’s inflation rate target for the first full quarter since December 2012.
  • Wage growth has been picking up in the Eurozone as well; in the first three months of 2018, hourly wages rose 2 percent – one of the key reasons given by the ECB to not only stay the course at this past week’s monthly meeting, but to give clear forward guidance that rates would stay at this rate well into 2019, if not beyond.
  • Bottom line: Eurozone growth has benefitted from astute central bank policies over the past six years, improving the investment climate.  Barring geopolitical issues, or policy-generated challenges from tariff negotiations and Brexit, the current course could become self-sustaining as the ECB eventually withdraws its support and follows the U.S. path of rate normalization.

 


All data Source: Bloomberg on their respective dates, unless otherwise noted.

Definition:

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

 

 

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