Market Commentary: Germany continues to lead growth in the EU

Economic figures in the European region show that a gap between the more business friendly German economy and the French economy is widening. German economic growth increased more than economists had forecast in the first quarter of 2014.

On the other hand data from France shows that the economy is stalling once more. Germany thus remains the main growth driver in the Eurozone as German growth continues to outpace the EU average.  As a sign of confidence by investors the DAX stock index continues to trade near record levels.

Even so, the risk to growth in the region coming from a slowing Chinese market and the threat of a trade war with Russia impinge on the outlook in the near term. The risk to growth in the EU is particularly highlighted by a euro-area economy that is still struggling to shrug off the shadow of deflation. Firms typically lower prices as growth in sales decelerates while consumers postpone purchases awaiting lower prices thus leading to a vicious circle.

The European Central Bank is expected to respond to this threat, probably in June, with a series of measures. An interest rate cut is the most expected by most investors, while the most hawkish anticipate liquidity injections. Liquidity injections, or quantitative easing as they have come to be referred to, would provide a significant short-term boost to equity and bond markets. Market sources estimate that European Equity markets may increase by as much as 10%.
 
However, the main impact would be on the exchange rate, which at 1.37 against the dollar is still a headwind to European industries. A weaker Euro would provide a lifeline to the less competitive southern rim while boosting competitiveness in the more efficient north.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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