Italy Downgraded, German Growth Slashed, Greek Stocks Collapse; 2015 Eurozone Depression Ahead

2015 Eurozone Depression AheadWhile the mainstream was telling us last year (and well into 2014) that the eurozone economy was coming back, I held steadfast in my prediction that the eurozone’s economic problems would only worsen. Having had the luxury of visiting Europe on six different occasions this year, I’ve seen firsthand the deterioration in their economy.

And going into 2015, I’m predicting the worst is ahead for the eurozone economically.

Italy’s Misery

Italy is the third biggest economy in the eurozone and the ninth biggest in the world. Rating agency Standard & Poor’s has just downgraded Italy’s debt to one notch above junk! The agency said, “Our forecast…reflects our view of Italy’s weak domestic fundamentals, including its difficult business environment and competitiveness challenges.” (Source: “S&P cuts Italy’s credit rating citing weak economy,” The Associated Press, December 5, 2014.)

Having visited Italy a few times this year, I can attest to the economic challenges the country is facing. Take out tourism, and Italy is in a depression. Unemployment in the country is rampant; youth unemployment has skyrocketed to above 43% and overall unemployment is at 13%—the highest since 1977. Italy is currently going through its worst recession since World War II. (Source: Bloomberg, November 28, 2014.)

German Growth Slashed in Half

While Italy has been in trouble for a very long time, we now are starting to see problems brewing in the biggest powerhouse of the eurozone—Germany.

The central bank of Germany, the Bundesbank, slashed its forecast for the country’s growth in half. It expects the German economy to grow by just one percent in 2015. In its previous forecast, the Bundesbank expected the German economy to grow by two percent.

Greece in Outright Depression

This week, the Greek stock market lost 19%, bringing its total loss for the year to 28%. Interest rate yields on Greek bonds are now at their highest level since 2012. And now Greek citizens need to go back to the polls to elect a president, placing more uncertainty on the economy. The turmoil in Greece that started several years ago never ended; it just got worse.

Eurozone and Dow Jones Industrial Average

As I have written many times, almost half of the S&P 500 companies derive sales from the eurozone. The weaker economy there will put pressure on their earnings.

To provide some perspective, 11 of the 30 companies on the Dow Jones Industrial Average provide their revenue figures from Europe in their financial reporting. In the third quarter of this year, eight of these 11 companies reported lower year-over-year growth figures, and six of these 11 companies reported year-over-year sales declines in the eurozone.

Companies in the Dow Jones Industrial Average, like E. I. du Pont de Nemours and Company (NYSE/DD), The Coca-Cola Company (NYSE/KO), and McDonalds Corporation (NYSE/MCD), have been reporting lower year-over-year revenue from Europe for three consecutive quarters. (Source: FactSet, November 24, 2014.)

Add continued “bad news” from the eurozone as another negative factor working against North American stock markets.