By Sarah Hewin
Ukraine’s crisis is currently dominating the headlines. As a result, there is a risk that investors may miss the bigger picture. The world economy is set to accelerate for the second consecutive year. What is less widely recognised is that Europe is the `swing factor’ driving this year’s recovery.
After two years of contraction, the euro area is likely to grow around 1.3% in 2014. That’s a positive `swing’ of 1.7 percentage points from last year’s contraction.
The 18-country euro area is almost as big as the US economy, and its USD 13tn of annual output equals 17% of the global total. A sharp turnaround in this giant economic and currency bloc is thus likely to have a significant effect on the rest of the world.
For emerging markets, Europe’s revival is particularly welcome because it is being led by domestic demand. As a result, economies across Asia, Africa, the Middle East and Latin America that count the euro area as one of their main export markets are likely to be among the biggest beneficiaries.
The improvement in Europe’s outlook was scarcely anticipated only two years ago, when the euro area came close to collapsing. A deft move in 2012 by the European Central Bank under the newly appointed President Mario Draghi, who promised to provide emergency funding to any euro-area government facing problems selling debt, brought the region back from the brink.
Although the legitimacy of the so-called Outright Monetary Transactions – the bond-buying plan unveiled by Draghi to provide cash-strapped governments with emergency funding – is being questioned, the move has had the desired impact: the region has shaken off its extreme pessimism, business confidence is gradually returning, and sovereign bond yields are easing back to normal.
The good news for emerging-market exporters is that domestic demand in the euro area is on the rise again, after more than two years of sharp contraction, as investment picks up, consumer spending rises and the decline in government spending ends – and, in some countries, reverses.
Among the larger euro-area economies, Germany’s growth prospects look best. Real wages in the region’s largest economy should recover and employment is rising. Investment is growing after a prolonged decline and should accelerate through 2015, the squeeze on government finances is easing, and higher immigration and the eventual introduction of a minimum wage should boost consumer spending.
A bounce in German domestic demand should shrink the country’s current account surplus, the excess in its exports of goods and services over imports.
France and Italy pulled out of recession in 2013 and the reform agenda is gaining more traction. Meanwhile, the euro-area peripheral economies are reporting falling unemployment; import demand should pick up as these economies emerge from deep recession, capping current account surpluses.
The euro area’s record current account surplus is likely to peak later this year as import growth outpaces export growth, and then start diminishing.
Europe’s nascent revival comes at an opportune time for emerging markets. Since the global financial crisis of 2008-09, these economies have relied on domestic consumption, government and private investment, and trade with other emerging markets to fuel growth as recessions in the US and Europe dragged exports lower.
As consumption starts to power the euro-area recovery, the impact is likely to be felt in countries as far-flung as India, Singapore, Brazil and Nigeria. These four emerging economies, along with Algeria and Turkey, are among the top 10 non-European emerging-market exporters to the euro area. These economies also have more exposure to the euro area than to the US.
For the other exporters on this top 10 list – South Korea, China, Hong Kong and Saudi Arabia – exports to the euro area account for one-half to three-quarters the value of their exports to the US; the ratio rises to 80-100% when their exports to the broader 28-member European Union are considered.
Our recent study shows that a return to December 2011 import levels for the euro area would mean a substantial rise in exports from some emerging markets. The latest data show that South Korean and Indonesian exports would rise by 24%, exports from Malaysia and Taiwan would rise by 14%, and exports from South Africa, India, China and Singapore would rise by 11-13%.
Generally, the euro area is more important than the US as a destination for African and Middle Eastern exports. For Asian exporters, the European Union is as important as the US, with each taking in around USD 500bn of imports from developing Asia.
Indeed, the euro area imports more from China than from the US; it accounts for over one-quarter of African exports, making it three times the size of the US market for African exports. For exports from the Middle East, it is twice the size of the US market.
Europe is still not out of the woods as doubts linger about the ability of some peripheral economies, such as Greece, to repay creditors, and others to return to pre-crisis trend growth rates. However, a consumer-led upturn is unfolding across the region.
The ongoing unrest in Ukraine is likely to have a limited, if any, impact on the euro-area economies and should not stall the region’s recovery. Europe’s upturn gives emerging markets reason for cheer as US monetary conditions tighten and China undergoes a policy-led slowdown.
The writer is Regional Head of Research for Europe at Standard Chartered Bank