As the first month of 2022 ends, the performances of the Eurozone’s individual national economies and equity markets vary widely, reflecting differences in the timing and extent of the waves of Covid, in the measures taken to combat the pandemic, in the structures of the economies, and in government economic policies.
The flash estimates for the fourth quarter of 2021 indicate that the overall Eurozone economy slowed down to a 0.3% q/q rate, with some considerable regional divergence. France’s GDP advanced at a strong 0.7% q/q rate, and Italy’s growth was close behind at 0.6%. Portugal surprised with a 1.6% q/q advance. For the full year 2021, France’s economy advanced by a very strong 7%, buoyed by ample government stimulus outlays and a pandemic policy that focused on promoting vaccination. The size of this rebound also reflects the fact that the previous downturn in France was particularly steep. In contrast, the largest economy, that of Germany, contracted in the quarter at a -0.7% q/q pace and advanced for the full year at a modest 2.8% rate. The German economy was hit hard by the Omicron wave, given the country’s relatively low vaccination rate. Also there has been persistent supply bottlenecks that have had severe effects on the auto sector. The slowdown in the Chinese economy is also important for the German economy, with their heavy dependence on exports accounting for some 46% of GDP.
A first look at Eurozone developments in January provides a more up-to-date picture, indicating that the growth slowdown is continuing. The flash Eurozone Composite Purchasing Managers’ Index for January declined from 53.3 in December to 52.4 in January, which is the slowest rate of output growth since last March. The Omicron variant increased its negative impact, slowing service sector growth sharply as governments reimposed restrictions. Consumer and hospitality-oriented businesses are being hit hard. On the other hand, the manufacturing sector is doing relatively well, accelerating at the fastest pace since last August as supply constraints are finally easing. Also, business service sector providers and financial services are doing better than services that require face-to-face contact with consumers are doing. These developments reflect rebounding business activity in Germany, following a contraction in December, and a slowdown in growth in the French economy. It was France’s slowest pace since last April as a result of sharply weaker service sector activity and only a slight advance in manufacturing. It is the services sector that drives the French economy, whereas the manufacturing sector is of particular importance in the German economy.
The flash PMI reports indicate that average selling prices in the Eurozone were advancing at a record pace in January, with both increasing wages and energy costs more than offsetting easing in raw materials prices. We will see the Eurozone CPI, which is forecast to show a slight easing, on February 2. We shall see. We agree with those expecting that inflationary pressures will cool over the course of this year and that any ECB tightening will not begin until 2023. Imminent cooling of inflation, however, seems unlikely. After a soft first quarter, Eurozone economies are expected to gain momentum in the second and third quarters, with growth for the year 2022 of about 4%, in line with the rate expected for the US economy.
Eurozone stocks in the 12-month period through January 28, 2022, as measured by the MSCI EMU Index, gained 8.1% on a total-return basis. That return includes a 6.8% loss over the past three months. In comparison, the S&P 500 Index gained 18.7% over the same 12-month period. One factor contributing to this difference is that US economy grew somewhat faster than the Eurozone economy did last year. A more significant factor is the differences in the weight of the information technology sector in the two indices, 29.3% of the S&P 500 Index, compared with just 12.7% of the MSCI EMU Index. That sector powered US stocks last year.
There was considerable variation in the performance of national Eurozone equity markets over the past 12 months. Among the largest economies, France, which has the largest equity market, outperformed significantly, with the MSCI France Index gaining 15.5%. Italy also performed well, as the MSCI Italy 25/50 Index gained 12.8%. Netherlands underperformed the Eurozone average, with the MSCI Netherlands 25/50 Index gaining 5.5%. Spain’s stocks had a bad year, with the MSCI Spain 25/50 Index up only 1.4%. Germany’s stocks had the worst performance of these six countries. The MSCI Germany Index ended the 12-month period up less than 1%. The early signs of improvements in the German economy in January could foreshadow a better year for German equities in 2022. There are many uncertainties, however, including the future course of the pandemic, the Ukraine crisis and its effects on the energy markets, the speed of improvements in supply chains, and the outlook for the Chinese economy. At Cumberland Advisors we are maintaining a diversified position in European equity markets in our International and Global Equity ETF Portfolios.
William H. Witherell, Ph.D.
Chief Global Economist
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Sources: Oxford Economics, Goldman Sachs Economic Research, etf.com, Financial Times, New York Times, BBH Currency Strategy
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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
