Not too long ago, I reported that Italy, the third-biggest economy in the eurozone, had fallen back into recession.
Now Germany’s economy is pulling back. In the second quarter of 2014, the largest economy in the eurozone witnessed a decline in its gross domestic product (GDP)—the first decline in Germany’s GDP since the first quarter of 2013. (Source: Destatis, August 14, 2014.)
And more difficult times could lie ahead…
In August, the ZEW Indicator of Economic Sentiment, a survey that asks analysts and investors where the German economy will go, posted a massive decline. The index collapsed 18.5 points to sit at 8.6 points. This indicator has been declining for eight consecutive months and now sits at its lowest level since December of 2012. (Source: ZEW, August 12, 2014.)
Not only does the ZEW indicator provide an idea about the business cycle in Germany, it also gives us an idea of where the eurozone will go, since Germany is the biggest economic hub in the region.
But there’s more…
France, the second-biggest economy in the eurozone, is also in a precarious position—and a recession may not be too far away for France.
After seeing its GDP grow by only 0.4% in 2013, France’s GDP came in at zero for the first two quarters of 2014. (Source: France’s National Institute of Statistics and Economic Studies, August 14, 2014.)
France’s problems don’t end there. This major eurozone country is experiencing rampant unemployment, which has remained elevated for a very long time.
While I understand North Americans may not be interested in knowing much about the economic slowdown in the eurozone, we must remember that about 40% of the public companies that make up the S&P 500 derive sales from Europe. If the eurozone faces an economic slowdown—and it is—corporate earnings of American companies will suffer.
In the global economy, America won’t be able to avoid the ramifications of a slowdown in the eurozone simply because the U.S. economy is so weak itself. After all, it has been six long years of zero interest rates due to the fear our economy can’t sustain higher rates. Thus, how can we survive a global economic slowdown?
For the benefit of my readers: the International Monetary Fund (IMF) is expecting economic growth of only 1.7% for the U.S. in 2014 and 1.1% for the eurozone this year. (Source: IMF World Economic Outlook Update, July 24, 2014.) This is the slowest economic growth we’ve experienced since 2009.
Why does the stock market keep going up on the backdrop of this? Maybe it’s not a real stock market rally. Maybe it’s a fake.