Macroeconomic Update: Europe

Nov 09, 2017
Industrial production, consumer confidence and investor sentiment all point to sustained strength of European economy

From obvious problems, to those simmering in the background, the macroeconomic outlook can present a host of issues for the corporate and IRO to consider. So what are Europe’s current hot topics? And how should experienced IROs tackle the macroeconomic challenges on the horizon?  

‘There is little doubt that the eurozone economy has entered the fast lane again, with strong domestic fundamentals and an improving export performance thanks to rising global demand providing pillars of support to what has long looked like a fragile and unspectacular recovery,’ comments Oliver Kolodseike, senior economist at the Centre for Economics and Business Research (CEBR).

He adds that the eurozone economy grew 0.6 percent in the second quarter –twice as fast as the UK – and there are so far no signs that growth will slow in the second half of 2017. ‘Recent data points such as industrial production, business and consumer confidence, and investor sentiment all point to sustained strength of the region’s economy,’ he says.

But this growth brings several challenges, not least a strong euro. Kolodseike notes: ‘Continuing the ride at maximum speed will not be an easy task and besides the political situation in Spain, there also remains the issue of a relatively strong euro. At the beginning of 2016, many analysts were expecting the euro to reach parity against the dollar, but the euro now stands 8 percent higher against the US currency than a year ago.’

Although a strong euro may boost domestic demand as it makes imports cheaper, it also increases the cost of eurozone exports on global markets and complicates things at the European Central Bank (ECB).

Kolodseike adds: ‘The issue with cheap imports is that it exerts downward pressure on inflation, which has, in any case, been very low across the eurozone for quite some time. Core inflation – which excludes energy and food items – stood at just 1.3 percent in September and therefore remained well below the ECB’s target of just under 2 percent.’

Echoing Kolodseike’s sense of caution, John Fender, professor of macroeconomics at the University of Birmingham, comments: ‘The overall macroeconomic picture in Europe does not seem too bad. GDP growth is reasonably satisfactory, at just over 2 percent, and might be expected to continue at such a rate, and inflation remains subdued at 1.5 percent.

‘However, there are a whole number of things that could go wrong. The economic implications of the constitutional crisis in Spain are by no means clear. It is by no means impossible that the debt crisis may flare up again and it will be interesting to see how French president Emmanuel Macron’s labor market reforms pan out.

‘Youth unemployment in some eurozone countries will remain a major problem,’ continues Fender. ‘There could be major terrorist incidents, and the migration flows may still be a cause for concern. Global macroeconomic instability could well impact Europe – and with world leaders like Donald Trump, Kim Jung-Un and Vladimir Putin, global macroeconomic instability is what we can expect. So, there is no room for complacency.’

Daniel Fard-Yazdani is co-head of investor relations at German media group Axel Springer. Within his team there is no room for such complacency. But he also points to a need for IROs to drill down and communicate the particular issues that specifically affect the business.

‘Investors and analysts most often already have a comprehensive knowledge and information flow on the macro trends, so instead of discussing these trends and data with them, we feel it is more value-adding to discuss how the overall trends really affect our various businesses.

‘Therefore, understanding these transmissions is what is most relevant and we spend a decent amount of our time gathering information internally to enhance our understanding. This means that we can confirm assumptions investors and analysts are making, or can highlight instances where a common perception may turn out to be inaccurate.’

For Ozan Kacar, head of IR at DAX constituent HeidelbergCement, explaining the impact of macroeconomic issues is also very much front of mind. ‘There are always negative and positive impacts of macroeconomic and political developments,’ he comments.

‘Our job as investor relations is to keep the volatility as limited as possible. This depends a lot on the sector of course and, more than that, how your company positions itself for future risks and opportunities.’

There is no doubt that Macroeconomic turbulence creates pressure on the stock. ‘This volatility can sometimes overshadow a company’s strong position, and this requires additional IR effort,’ observes Kacar. ‘IROs should watch closely, understand the possible impacts and, when necessary, proactively inform the markets and investors about the situation.’

This article was produced by ELITE Connect and originally published on the ELITE Connect platform

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