The Eurozone Could Be A Problem For Stocks

A few weeks ago I asked a simple question: “Can The U.S. Economy Stand Alone?”

“The following chart is food for thought. There are extremely high expectations that the U.S. economy will achieve “lift off” in terms of economic growth eventually achieving 3-4% annualized growth rates. The chart below shows the nominal GDP of the Eurozone and U.S.”

Is it possible, that in globally interconnected economy, the U.S. can stand alone?

It certainly seems that the answer to that question is currently “yes” as financial markets hit “new all-time” highs and economic data has rebounded in the second quarter following a sharp Q1 decline. However, as is always the case, the issue of sustainability is most critical.

Sy Harding recently wrote an interesting piece entitled “The Eurozone Is A Growing Problem For U.S. Economy?” in which he cited three very crucial points relating to the issue of sustainability:

• The 18-nation euro-zone is the largest economy in the world, eclipsing that of the U.S.
• The euro-zone is the largest trading partner of the U.S. (the largest importer of U.S. goods, the largest exporter of goods to the U.S.).
• The euro-zone is in an economic crisis.

The chart of GDP above clearly illustrates the importance of Sy’s points. Importantly, the economic conditions in the Eurozone are getting “worse” rather than “better.” According to Sy:

“It slowed further to 0.0% quarter-over-quarter in the second quarter.

Worse, Germany, the euro-zone’s largest and previously strongest economy, unexpectedly saw its economy contract to negative -0.2% in the second quarter. France, the second largest euro-zone economy, saw its growth slow to 0.0% for the quarter. Italy, Europe’s fourth largest economy, slid back into recession, its GDP at negative 0.8% in the second quarter, its second straight quarterly contraction.

Reports this week indicate the problems are worsening in the third quarter.

Retail sales in Germany plunged 1.4% in July, after declining 0.4% in the second quarter.

Germany’s Ifo business confidence index fell in August for the fourth straight month, to its lowest level since July 2013. Market research group GfK reported its German consumer expectations index ‘collapsed’ in August to its most pessimistic level since 1980. Perhaps for good reason, since the overall euro-zone’s unemployment rate remained in double-digits at 11.5% in July, just 0.5% lower than its peak of 12% in 2013.”