Destination: Zero

by Martin Denholm, Senior Editor, Investment U
Thursday, April 8, 2010

“Economic activity gathered steam in most of the major OECD [Organization for Economic Cooperation and Development] economies in the last quarter of 2009, with the notable exception of…

… the euro area.”

“Gathering steam” certainly isn’t a description that applies to GDP growth within the 16-nation Eurozone region…

That’s because Eurostat figures show that the Eurozone notched up zero growth over the final quarter of 2009. It meant that for the full year, the Eurozone economy contracted by 2.2%.

Chief among the reasons for such a slowdown are the well-documented debt problems for several Eurozone nations. And while it’s all very well for OECD Chief Economist Pier Carlo Padoan to state the obvious and say that Europe’s most pressing issue is to reducing its debt level, this is clearly easier said than done.

Meanwhile, it’s a different story in Britain…

As Election Date Is Announced, U.K. Economy Shows Promising Signs

One day after British Prime Minister Gordon Brown announced May 6 for the U.K. general election date, the OECD handed him some good news.

It predicted that the U.K. economy grew at an annualized 2% rate during the first quarter and further forecast that it will expand at a 3.1% annual clip during the April-June period.

If the latter proves correct (bearing in mind the old adage that there are, “Lies, damn lies and statistics”), it will top every G7 nation, except Canada.

Figures from Britain’s own business groups lend weight to the argument that having finally emerged from recession during the fourth quarter of 2009, the economy is mounting a decent recovery.

In its survey of 5,500 companies, the British Chambers of Commerce said the service sector is performing well. Having hit a three-year high in February, the sector showed expansion again in March. Employment at larger service sector companies also rose during the month, ending a two-year streak of job losses (although a full recovery won’t happen until small business employment also rises). Services are critical to Britain’s economy, since the sector accounts for about three-quarters of GDP growth.

However, with economic problems ongoing for Britain’s major European trading partners, it could pose a threat to the U.K. manufacturing and export markets and hamper the recovery.

Clearly, though, with the general election just four weeks away, the news bodes well for Brown and the incumbent Labour government. They will enforce the idea that they’ve guided the country through the recession and the economy is now improving under their watch.

However, quoted in The Times, Howard Archer, Chief U.K. and European economist at IHS Global Insight, notes that with Britain heavily in debt, a better than expected economic recovery might actually work against the government. One of its major election arguments is that it doesn’t want to cut spending while the economy remains weak and growth is unsustained. The opposing Conservative Party wants to cut spending immediately.

The next key date comes on April 23, when the latest official GDP figures are released.

Best regards,

Martin Denholm

P.S. My colleagues, Alexander Green and Karim Rahemtulla, have written about Europe’s myriad financial problems recently. You can check out their ways to profit from European downside in these articles:

• Why It’s “Mayday” For the Euro… And What You Should Do
• The PIIGS Are Getting Sloppier… Here’s How to Clean Up
• These “PIIGS” Aren’t Flying… But Here’s An Investment That Will

And if you’re looking for a contrarian take on Europe, look no further than the uber-contrarian Marc Lichtenfeld, who suggests five European rebound investments and Tony Daltorio, who has several other contrarian European plays for you to consider.

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