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Economics: Eurozone
Economics – Markets – Strategy
levels (Chart 6). Despite higher input costs, that corporate earnings growth still
rose by 9% (YoY) in Apr08 for companies listed in the Dow Jones EURO STOXX
index. Interest rates are also not at restrictive levels. On the whole, we expect
investment to still support growth.
Exports are a key support
Export growth has been a key support for growth in 2006 and 2007. Net exports
has added 0.9%-pt and 0.2%-pt to the full year GDP growth rate in 2006 and
2007. In 2008, we expect net exports to continue to add 0.2%-pt to growth, thus
playing a key role in keeping overall growth around potential. One factor that
is overemphasized with regards to export growth rate is the strength of the
euro. In the present context, we do not read euro strength as a negative.
Euro strength has
helped Eurozone
support global
growth and curb
inflation in the face
of US slowdown
Euro strength - is it good or bad?
In 1Q08, the euro was up circa 8% (YoY) in real trade weighted terms or real
effective exchange rate (REER) terms. Higher input costs and a strengthening
euro are often together cited as negative factors for exports. However, a strengthening
euro acts in opposition to higher input costs in practice. If the euro were not
stronger, exporters’ margins would anyway be lowered by higher input costs.
Pointing to EUR strength as a separate negative is, therefore, not meaningful.
Indeed, despite a strengthening euro, export growth (Chart 7) held up in 1Q08
at around 5% (YoY and QoQ, saar, 2qma). This is hardly an evidence of erosion
of export competitiveness. In contrast, in 2003, when the euro had strengthened
by 12% in REER terms, exports hardly grew.
In fact, to the extent that a stronger EUR helps curb inflation and support purchasing
power in the Eurozone, we see the stronger euro as a positive. One of the biggest
benefits of a stronger euro is that it helps cushion the global economy (and by
extension the Eurozone) from the drag of a slowing US economy. In terms of
pure size, Eurozone economy has almost doubled in nominal USD terms in 2008
compared to 2000 - USD 13trn vs USD 6trn. Thus, from being about 60% the size
of the US, the Eurozone has expanded to almost 90% the size of the US.
Of course, this is not a structural change, but rather a cyclical currency led change.
Yet, this has helped the Eurozone play a major role in supporting global demand
growth and offset slowing US demand. This is especially evident if we consider
the growth in GDP in nominal USD terms which is relevant as an indication of
strength of Eurozone’s import demand. Eurozone GDP grew by 16% in nominal
terms in 2007. If the EUR had not appreciated, GDP growth would have been
Chart 7: Annual real export growth
%, YoY, annual data
10
9
8
7
6
5
4
3
2
1
12% REER
growth
4Q07-1Q08 saw 8% (YoY) REER
growth & 5% export growth
2000 2002 2004 2006 2008F
Chart 8: EZ GDP growth - stronger EUR cushions
US slowdown
% p.a, nom GDP, USD
20
GDP (EUR/USD at 2004 level:1.24)
GDP (prevailing EUR/USD rates)
16
12
8
4
0
2005 2006 2007 2008F
150