Keeping a Watchful Eye on the European Economic Situation

The economic situation is improving in the United States, although there continue to be some growth issues in big-ticket items and housing. The Consumer Confidence reading fell in July for the second straight month. June Durable Goods Orders fell one percent with economists expecting a one-percent increase. This was the second straight month of disappointment and suggested weakness towards spending on big-ticket items, such as furniture and appliances. And, until we see spending pick up, growth may be stagnant.

And, while markets have been rallying, do not lose sight of the mounting debt and deficit issues in the U.S. and abroad in Europe.

The real problem I see is in the 27-member European Union (EU). The EU is a critical part of the global economies given it has more than 500 million people accounting for about 28% of the world’s gross world product in 2009, according to data from the International Monetary Fund. Problems in the EU can and will likely spread to other economies in Asia, Latin America, and North America. The EU is critical to the global economic recovery. Moody’s just cut the credit rating on Ireland, adding to existing debt issues in Greece, Spain, and Portugal. Greece and Portugal are not key economies, but Spain is the world’s ninth largest economy, so turmoil in that country could be devastating to the EU.

To help the EU countries in trouble, a trillion-dollar austerity program was set up in Europe that is aimed at helping economies, yet it could actually negatively impact economic growth in this vital region. The last thing the EU wants is weak members dragging the member group down, especially at a time when the countries are trying to rebound from the global recession.

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With Europe expected to be sluggish in 2010 and 2011, there could be more problems down the road. Take a look at the comparative growth rates. In Europe, there are concerns with the slow growth there. In Germany, the GDP growth in 2010 is pegged at a weak 1.5%, but a nice reversal from a five-percent decline in 2009. Growth in 2011 is even lower at 1.4%. In comparison, the U.S. economy is predicted to grow 2.8% this year and moderate to 2.4% in 2011.

The Organization for Economic Cooperation and Development (OECD) reported that the world’s rich economies will slow in the first half of 2010, but expects growth in the U.S. and Japan to exceed Europe. I feel that Europe may continue to underperform the global markets in 2010 and 2011.

So don’t be overly focused on the U.S.; you need to also monitor the situation in Europe. There has been some positive earnings news from European firms, and sentiment in the eurozone jumped in July, but it is only one reading and we need to see this reflected in the region’s growth.

And don’t forget China, with some signs of slowing there, which could impact other global economies.