Economic growth in Europe – key aspects

European Central Bank's (ECB) massive quantitative easing of € 60 billion per month, seems to have generated not only optimism but growth across regions. However underlying growth dynamics remain less to cheer for.

Recent PMI report registered pace of growth not seen in nearly four years.

Key benefits -

• Weaker Euro - Weaker Euro against many of its trading partners will be helpful for the countries in the region to steal market share of exports, which is already being seen as German new export orders rose at the sharpest pace and Italy registered a Non-EU trade balance jumped to € 2.84 billion from previous deficit of €-0.23 billion.
  
  
• Lower oil - Europe is one of the largest crude deficit region. Lower crude price will boost the purse of public and government coffers.

Challenges -

• Unemployment rate - unemployment rate in the Euro zone is highest among developed region, hovering way above 10%, when it is below 6% in US and UK and below 4% in Japan. Moreover years of internal depreciation through austerity has made public mood sour.

• Productivity - Productivity growth is very weak, hovering within 0-1% for last 4 years.

• Internal imbalance - Internal imbalance as measured by TARGET 2 still hovers close to € 500 billion.

• Corporate investments - R&D spending in Euro zone is just 2.2% of GDP compared to 2.8% in US and 3.4% in Japan, Moreover, IT spending is around 1.6% compared to 3.5% in US.

Euro is currently trading at 1.103, gaining from broad based weakness in dollar. However until growth dynamics pick up further and structural issue remain solved, it is difficult to be bullish over Euro zone as a whole for longer term.