Thoughts from the road – Europe

I recently traveled in the United Kingdom and Germany with Aidan Corcoran, who heads our European macro effort, visiting with policy makers, CEOs, and clients. Our key take-aways from this latest trip are as follows:

• Across much of Europe, we continue to expect slow growth and/or another stall-speed recession in the coming quarters. Importantly, however, we do expect to see some consumer resilience in 2024, as real wages begin to turn more positive and monetary policy becomes less restrictive. We stick to our 80 basis points Eurozone Real GDP growth forecast in 2024 (now slightly above consensus at 70 basis points). 

• We see the Bank of England on hold for longer than most developed market central banks; by comparison, we think that the ECB could turn more dovish more quickly. Importantly, as we detail below, one of the ECB’s favorite measures of inflation (the persistent component of core inflation index) has hooked down. 

• Changing of the economic guards? When Europe had its sovereign debt crisis about a decade ago, it was Germany, the U.K., and the Netherlands that provided the economic ballast. Today, by comparison, these countries are each feeling the pinch of a slower China, the adverse impact of Russia/Ukraine on their energy policies, and more regulatory complexity. As a result, the economic momentum since COVID has been coming more from the traditional ‘periphery’, including Spain, Greece, and Italy. 

• On the investment front, we continue to spend time with companies within sectors that don’t necessarily rely on traditional macro tailwinds. In fact, in many instances, areas such as automation and fertility have emerged as attractive opportunities as they offer solutions to structural issues that are impacting growth in Europe (e.g., lackluster demographics). Meanwhile, tougher bank regulation is leading to more private lending and more risk transfer opportunities for opportunistic pools of capital, while over-indebtedness of both public and private entities is leading to some noteworthy corporate carve-out and divestiture opportunities. During this trip we also met with several growth companies that are eager to expand outside of their home countries and/or take their products and services to the United States or Asia. Finally, Europe continues to be a leader in several secular growth areas such as decarbonization and data. 

EXHIBIT 1:

Household Consumption In Europe Has Struggled To Return To Pre-COVID Levels