May 13, 2015 was a busy day for the release of European economic results. How did the European economy fare and how do these numbers affect U.S. companies?
Forecasts, for the European economy as a whole, call for the region to muddle through a “mild cyclical upswing” driven by cheaper oil, a lower euro, and government spending. (Source: European Commission, May 5, 2015.)
The same forecasts expect gross domestic product (GDP) in the European Union to expand at 1.8% in 2015, and 2.1% in 2016. Just as importantly, inflation is assumed to move from the current reading of -0.1% to a healthy 1.5% by 2016 year-end.
So, better times ahead are assumed in official forecasts. But the latest data suggest that the recovery will be painfully slow.
European Economic Data for May 2015
Germany’s latest GDP numbers point to an economy that only expanded 0.3% in the first quarter of 2015. That is below the 0.5% expansion expected and below the 0.7% growth that Germany experienced in the last quarter of 2014. (Source: Federal Statistical Office of Germany, May 13, 2015.)
It’s almost ridiculous to speak of economic growth below one percent, as the reported number may be just noise or errors. Actual economic growth may be zero percent. But near zero percent expansion is simply the reality for much of Europe. In fact, Germany’s economy only grew at 0.1% in 2013, and 1.6% in 2014. (Source: European Commission, last accessed May 13, 2015.)
Italy also released its GDP estimates on May 13, 2015; with lots of numbers close to zero percent as well. GDP grew at 0.3% in the first quarter of 2015, compared to the final quarter of 2014. But total national output, 385 billion euros, stayed unchanged from the same period last year. That is to say, Italy experienced zero percent GDP growth year-over-year. (Source: Istat, last accessed May 13, 2015.)
Economists would call this progress, as Italy’s GDP growth came in at -1.7% in 2013 and -0.4% in 2014. From where I sit, the progress is painfully slow and results may continue to frustrate economists with overly optimistic forecasts.
A lot of the pain in Europe continues to be driven by high unemployment and debt levels that exceed the size of the economy.
Italy’s government debt as a percentage of GDP stands at 132%, as of 2014 year-end. That means for every euro the economy generates, the Italian government must eventually pay back 1.32 euros to creditors. To say the least, European economies continue to struggle.
Europe’s Economy and U.S. Earnings
The latest numbers may be just noise, with results near zero, but what provides a clear signal is U.S. corporate earnings. American companies continue to feel the pain from a slow- to no-growth Europe.
For example, Ford Motor Co. (NYSE/F) sales in Europe have remained unchanged from 18.6 million units sold, in 2012, to the same total in 2014. In fact, the only region of growth for Ford has come from North America and China. (Source: Ford 2014 Annual Report, February 6, 2015.)
Another American company struggling in Europe is McDonalds Corp. (NYSE/MCD). The hamburger chain booked $7.85 billion of sales in Europe during 2012. Don’t hold your breath, though; McDonalds generated roughly the same amount in 2014—$7.81 billion. (Source: McDonalds 2014 Annual Report, March 1, 2015.)
Yet, another company struggling in Europe is General Electric Company (NYSE/GE). The company, which manufactures and sells everything from aircraft engines to transformers and microwaves, earned $26.7 billion in Europe during 2012. Two years down the road from then, General Electric only generated $25.3 billion in sales out of Europe.
When looking at all the S&P 500 companies, about 13% of total sales come from Europe. (Source: FactSet, May 8, 2015.)
Clearly a slower Europe will have some effect on U.S. corporate earnings. An optimistic European economic forecast, for 2015 and beyond, will need to materialize in order for the S&P 500 earnings to move higher.