French President Francois Hollande and Indian Prime Minister Manmohan Singh met on Thursday. Source: Getty Images.
Thursday, eurozone Q4 GDP contracted 0.6% q/q, missing expectations of -0.4% q/q. Likewise, Japan’s Q4 2012 GDP declined -0.1% q/q. But Japan nor the eurozone’s negative reports much impacted the Valentine’s Day mood, as broad markets ended the day flat-to-higher. Historically, a multi-speed global economy with some countries growing briskly and others less so or contracting is the rule rather than the exception. Moreover, some slowing is perfectly normal at this stage of expansion.
Germany and France, two of the monetary union’s biggest economies, declined 0.6% and 0.3% q/q respectively. Italy (-0.9% q/q) and Portugal (-1.8% q/q) also experienced steep declines as they continued dealing with severe economic competitiveness issues and the associated adjustments. However, economic figures—especially so for advance estimates of a broader economy—are subject to revision, often many times in the future with the potential for substantial change one way or another. That’s not to say we expect eurozone GDP to materially improve in subsequent revisions—just that the less than stellar print (no matter the degree to which it reflects malaise) confirms what’s been known about the region for some time.
Looking forward, what matters most for the eurozone is maintaining the pace of reforms necessary to boost economic competitiveness, while doing what’s necessary to support and maintain the union. Of course, if economic growth lags for a prolonged period or materially worsens, it’s certainly possible political support for current parties committed to maintaining the euro wanes. To date though, there’s little evidence of a marked weakening in political will or popular support.
In Japan, forecasts called for a small recovery following a Q3 dip of 1.0%. However, the preliminary estimate of Q4 GDP showed a fall of 0.1% q/q as business investment and exports offset strength in personal consumption. Here too, however, economic weakness has been anticipated for a while (some might argue decades). The market seemingly shrugged at the slight miss—and continued looking forward.
Of course, should the eurozone and Japan not return to growth for some time, all’s not lost. Rather, as noted earlier, the stronger bits in the world—the US, China and other Emerging Markets—likely continue to carry the rest along, though potentially at an overall slower rate. However, as we’ve written, slowing global growth in a maturing expansion isn’t atypical—and is a factor that has historically favored mega-cap stocks.