Euro area: Worst over, slow recovery ahead

“Confirmation of no recession for the Euro economy, improving business sentiment and the ECB going to cut rates should support European equities including small caps.”

  • Euro area business climate indicators are gradually picking up, providing a positive backdrop for European markets.
  • Slightly better growth, disinflation and imminent rate cuts paint a relatively positive environment for Euro equities.
  • The ECB starting to cut rates could also have a positive effect on European small caps later on.

Euro area real GDP barely advanced in 2023, in sharp contrast to the US economy which remained more resilient. Reasons included the higher European exposure to energy and manufacturing disruptions and weaker fiscal and consumption patterns. Nonetheless, relative to very poor expectations at the beginning of this year, European business climate indicators have repeatedly (yet modestly) surprised on the upside in recent months, a message repeated by this week’s PMIs. This points to a recovery, even if weak. This, combined with a more convincing downward trajectory in Eurozone inflation compared to the US, should allow the ECB to soon cut rates soon.

All in all, this background should continue to support European equities.

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