Eur(ozone) too Dour

Did you hear the shocking good news? The eurozone’s “surprise growth” in Q4 2013 is a sign the region’s recovery is “finally taking root!” Time to pop the top on that French champagne and break out the pricey German sausage and Italian cheese—growth is back! But there is one teensy little confusing aspect to mainstream media coverage of this joyous moment. This is the third straight quarter of GDP growth for the much-maligned bloc, not the first. The taken-aback tone with which Q4 growth was reported is a sign of just how dour sentiment is towards the region—and how far behind reality it is.

Flash eurozone GDP growth accelerated to +0.3% q/q in Q4, beating expectations of +0.2%—a continuation of a recovery that began in Q2 2013. Since that recovery began, headlines have bemoaned it as “fragile” and questioned its sustainability. Yet, rising LEIs have suggested overt pessimism wasn’t warranted, and now continued GDP growth indicates the LEI was more accurate than false fears of fragility. Of the 13 nations reporting quarterly growth in the Flash read, 10 grew. Greece, which reports only year-over year growth, contracted, but at a slower pace. The remaining nations to report—Ireland, Slovenia and Luxembourg—are very unlikely to move the needle negatively. Greece’s continued weakness appears likely to be at least somewhat offset by similarly sized Ireland, where statistics allude to growth.

Nowhere did fears prove more undeserved than in France. France grew +0.3%, surprising the many who believed the country was the new “sick man of Europe” after contracting Services and Manufacturing PMIs drove jitters of a possible double-dip recession. Yet French GDP rose more than expected, with household consumption up +0.5%, and Q3 GDP was revised up from -0.1% to flat. This illustrates the folly of drawing conclusions about an economy’s health based upon one or two negative data points, as many did with the PMIs—expectations didn’t match reality. However, this lowers expectations, which augurs well for future positive surprises.

Germany, Europe’s largest economy, continued growing as well. Granted, its +0.4% growth rate was tepid—as was its +1.3% growth in calendar year 2013. Faster growth likely would benefit the eurozone as a whole economically, but as with France, stocks react more to how reality compares to expectations—and slow as it might have been, analysts expected an even slower +0.3% q/q read.

The periphery, too, improved. Italy grew for the first time since Q2 2011 at +0.1%. Spain grew for the second consecutive quarter, coming in at +0.3% while Portugal grew +0.5%, its third straight expansion. That effectively means three of five PIIGS nations grew. Should Ireland come through with growth when it reports, four of five will have grown. And even in Greece, the pace of contraction has markedly slowed. In Q1 2013, GDP fell -5.5% y/y—in Q4, -2.6% q/q. The eurozone’s recovery, decried frequently as weak and uneven, became both stronger and broader in Q4.

We certainly don’t expect eurozone GDP to start skyrocketing overnight. Eighteen nations will always have huge disparities in growth rates, determined both by cyclical and structural factors. That said, slow and uneven can easily top analysts’ estimates—just as it did in Q4—providing a powerful tailwind for stocks.