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Economic Insights

While the world races to respond to the looming health crisis of the coronavirus and its tragic human cost, our columnist is also monitoring the effect on eurozone growth and finds a few one-off events that may lessen the impact.  

While the World Health Organization, China, and other nations are focused on stemming the tide of a burgeoning pandemic, we are keeping a close eye on how this global challenge may be affecting markets around the world. Not too long ago, we were of the opinion that European asset growth in 2020 would be dependent on global growth, in particular a need for better numbers out of the United States and China. The European Central Bank’s accommodative monetary policy would, we believed, help to improve the outlook in the eurozone, but a substantial reflation of the region’s economy would remain hostage to international developments.  

Unfortunately, just as we were starting to get confirmation of a eurozone recovery, hopes were set back by the outbreak of the coronavirus in China, which I believe may dent global growth and delay the recovery process for a few months.

Prior to the disruption of global activity from the virus, I was estimating consensus expectations of first quarter 2020 growth in the eurozone’s gross domestic product (GDP) somewhere in the neighborhood of 0.3% (quarter-on-quarter). Today, consensus is penciling in 0.1% growth for the first quarter 2020 over the first quarter 2019, a downgrade of roughly 0.2 percentage points (ppt) from the expected growth rate prior to the virus outbreak. Year-to-year, most estimates of the impact to growth are around 0.1 ppt.*

Fortunately, there were some one-off events during the fourth quarter 2019 that I believe may kick in positively in first quarter 2020 and thus might offset some of the economic impact of the virus.

  • Strikes over pension reforms in France took a dent out of port and transportation activity in fourth quarter 2019. This was a bit of a surprise because INSEE’s [the National Institute of Statistics and Economic Studies] surveys for France showed economic resilience over this time period. With the resumption of activity in first quarter 2020, these negative inventory and activity effects will reverse, in my opinion. Exports are already expected to have a slightly negative impact on French GDP in the first half of 2020 due to large irregular exports of defense and large civilian ships, but this also may reverse in the second half of 2020.
  • In the fourth quarter of 2019, Germany’s long-punished industrial sector was starting to return to positive growth. A good amount of that growth relates to trade with China so the impact of the coronavirus on trade may continue to be a drag on growth in Germany’s industrial sector for a while yet, but industrial production expectations over the next few months are still higher.

 

Chart 1.  Industrial Production is Still Working Through a Prior Growth Slowdown, but Consensus Expectations Over the Next Few Months are Positive
Industrial production, year over year (October 2016–December 2019)

Source: Haver Analytics.
For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.  Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.  Past performance is no guarantee of future results.

 

  • A big picture view of the past few weeks is that we saw some consolidation in the industrial production data alongside better manufacturing survey sentiment. Retail and consumer sentiment remained guarded, although actual construction and consumption activity held up and continued to provide a “base layer” for GDP growth. This is particularly true of wage growth – improved earnings by workers are a further cushion to consumption assuming savings rates do not spike.
  • Political volatility is low – for once. Regional elections in Italy provided markets with some temporary clarity on the ability of the current government to hang together, spurring a tightening of spreads and a reduction in worries about Italian populism. Despite the fact that we have reached a more bureaucratic negotiation stage between the European Union (EU) and the United Kingdom, the British government has managed to create some volatility in the British pound with some of its negotiating stances over regulatory alignment within a future EU-UK trade agreement. The general UK posture is very much geared toward the priorities of northeastern England – areas deindustrialized over time and more dependent on manufacturing than services.

Despite the timing of the virus relative to other market factors, we still see a lot of positive economic momentum. However, the virus and the data we’ve received so far suggest Europe is still facing low growth rates overall – it is still not achieving a breakout pace of growth.

*All data herein has been sourced from Bloomberg, except where otherwise indicated.

 

Glossary of Terms

A percentage point (ppt) is the unit for the arithmetic difference of two percentages.  For example, moving up from 40% to 44% is a 4 ppt difference.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.  If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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