The economic news out of Europe has ranged from disappointing to downright dismal in recent weeks. Even the seemingly positive news comes with dark clouds, as the latest labour report illustrates.
Both wages and labour costs rose in the euro zone in the second quarter, which ought to ease worries that the region is heading toward economy-crippling deflation. The problem is that the wage growth is too uneven to be meaningful – workers actually took home less pay in Italy, the Netherlands and Ireland – and unemployment is still sitting close to record levels in the most troubled economies.
Then there are the trade numbers, which revealed a widening surplus with the rest of the world in July – the largest in 18 months. But no one was in a mood to celebrate, because exports fell on a seasonally adjusted basis for the second month in a row, while imports remained largely flat.
The Organization for Economic Co-operation and Development this week slashed its euro zone growth forecast – below 1 per cent for this year and a mere 1.1 per cent in 2015 – and pleaded for more aggressive intervention by the European Central Bank to prevent a slide into economy-crushing deflation.
The revision from a slightly more optimistic forecast in May comes after a slew of underwhelming data. In the second quarter, even Germany, long the lone star in the monetary bloc, saw its economy shrink by 0.2 per cent from the previous quarter and 0.6 per cent on an annual basis. The French economy is stagnating. And for Italy, which is in the throes of an uncommon triple-dip recession, stagnation would be an improvement.
No wonder Germany's closely watched ZEW sentiment index, which gauges investor confidence, fell for the ninth consecutive month, hitting its lowest point since late 2012. "The economic climate is still characterized by great uncertainty," ZEW president Clemens Fuest, head of the ZEW research institute, said in a statement. "The risk of a sanction spiral with Russia continues to exist and economic activity in the euro zone remains disappointing."
But more than a few veteran observers of European economic trends refuse to join the doom-and-gloom crowd. They include Peter Schaffrik, head of European rates strategy at Royal Bank of Canada's investment arm in London.
"Clearly, we have a slower trajectory than what we expected going into the year," Mr. Schaffrik said in an interview during a visit to Toronto to meet bank clients. "But if we end up at about 1-per-cent real GDP growth … it's certainly better than zero. I don't think it's all that bad."
He lists a few euro zone bright spots, including Germany, parts of the Dutch economy and the "turnaround stories" – Ireland and Spain.
"I still think that Germany remains strong and probably will be strong for another couple of years," Mr. Schaffrik said.
Leaving aside worsening geopolitical tensions, including the Ukrainian crisis, the Russian sanctions and faltering Russian economy, which has undoubtedly hurt German exports, the country is well positioned to capitalize on a stronger U.S. recovery. And the domestic market remains in good shape, with high employment and healthy wage increases and strong demand for skilled labour in engineering and other sectors.
But if the euro zone laggards can't reverse their slide and tensions worsen, Germany is bound to feel the pinch. So investors are right to lean to the gloomier view until more of the dark clouds dissipate.