Why Europe Still Matters - Analyst Blog
February 15 2012 - 4:24AM
Zacks
We have a busy economic calendar on the home front today, but
initial trading action will likely reflect optimism on the European
situation following favorable comments from China about its plans
to invest in Europe. We also have fourth quarter GDP numbers for
the Euro-zone region, which shows that the French and German
economies did modestly better than expected. But the overall
outlook for the region’s economy is fairly grim.
The domestic economic reports on deck for release today include
Industrial Production numbers for January and minutes of the last
FOMC meeting.
The consensus view for the Euro-zone region is that its economy
will experience a recession in 2012. It appears that the downturn
got underway from the fourth quarter of 2011. With 9 of the group’s
17 countries experiencing economic contraction in the quarter, the
group’s fourth quarter GDP dropped 0.3%, the first negative growth
since the second quarter of 2009. The U.S. economy accelerated to a
2.8% growth rate in the same time period, though its growth pace is
expected to decelerate in the first quarter of 2012.
The technical definition of a recession is two back-to-back
quarters of negative economic growth. Italy, Greece, Portugal,
Belgium and the Netherlands already meet that condition, while
Spain is almost there as well.
The French and German growth numbers came in better than
expected. The German economy contracted in the fourth quarter, but
is expected to post positive growth in the current quarter. But
modest German growth won’t be enough to offset the impact of
spending cuts in the southern European nations, ensuring negative
group-wide GDP readings at least through the first half of the
year.
Greece, the "ground zero" of Europe’s troubles, is in a
particularly terrible situation. Its economy has contracted a
cumulative 17% in the four years through the end of 2011. The
country has just agreed to go through a substantially tougher
austerity plan to ensure a fresh bailout. The latest austerity
measure will see 15,000 public sector job cuts and a 22% cut in
minimum wages.
The thinking behind the tough fiscal medicine for Greece and
other Euro-zone countries is that these measures will help restore
confidence in the region’s finances, which will eventually result
in economic growth. Left-leaning political forces are contesting
the utility of this thinking, with the French presidential election
in April providing a critical platform for the debate. French
president Nicolas Sarkozy is trailing his socialist opponent in the
polls at present. His defeat in the April election would be a major
setback for the prevailing policy prescription, as he and German
chancellor Angela Merkel have been its strongest proponents.
On the earnings front, we have better-than-expected results this
morning from Comcast (CMCSK) and
Deere (DE). Zynga (ZNGA) posted
better-than-expected results, but provided a weak outlook. In other
news, Kellogg (K) is acquiring Procter
& Gamble’s (PG) Pringles business for $2.7 billion.
Procter & Gamble was initially planning to sell this business
to Diamond Foods (DMND), but the deal couldn’t go
through because of Diamond’s problems.
COMCAST CLA SPL (CMCSK): Free Stock Analysis Report
DEERE & CO (DE): Free Stock Analysis Report
DIAMOND FOODS (DMND): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis Report
ZYNGA INC (ZNGA): Free Stock Analysis Report
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