Unimaginable #3 Update: Europe Outpaces USA Growth -“New Global Contract” (Christine Lagarde, Head of IMF at Davos)

Unimaginable #3. European growth outpaces the USA turning negative interest rates positive, narrowing the differential keeping the EURO strong with little volatility. European company earnings are thoroughly underestimated due to the misconception that Europe is stuck in an old economy, but in reality companies (often unlisted) have embedded technology and services that keep them competitive and innovative AND allows them to dominate their respective markets globally, esp. in machinery & engineering. This explains continued strength in confidence, employment and unexpected growth.

2018 will be the year for machinery stocks! Machinery is needed to build not only manufactured goods, it is also required to build the manufacturing and energy infrastructures. Who are the supply kings of the machinery industry? Germany, Japan, Switzerland, Italy – mostly European! Who has the greatest demand for these machines? China, USA, Emerging Economies… the World!

The trouble is that many of the makers of sophisticated machinery are not necessarily listed (link to Unimaginable no. 4) and so you will see their contributions mostly in GDP growth and perhaps indirectly in the stock market. Here is a link to a WSJ article on where there is hidden value and why we can remain optimistic for global cyclical growth. Yeah, another SuperCycle!

Perception and expectations and at the moment reality puts the US economic growth ahead of Europe, but shouldn’t we be anticipating a neck in neck race? Germany, esp. in manufacturing has the most leverage to global growth pictured below:

The global manufacturing activity continues to climb.

Source: @MarkitEconomics; Read full article /WSJ-The Daily Shot

Here is the breakdown by country/region (Germany and the Eurozone lead)

Source: Scotiabank Economics /WSJ-The Daily Shot

PMI Manufacturing New Orders by Region (Euro Area on top by far)

Source: Credit Suisse / WSJ The Daily Shot

Practically every chart above with PMI manufacturing statistics shows Germany and the Eurozone accelerating the most. It is a trend in its infancy!

Taking a look at 2017 G7 GDP growth according to the National statistics offices and Bloomberg surveys, Canada was the highest with 3pct being followed by Germany, the Eurozone and the USA (2.3pct).

G7 2017 GDP Growth: Canada, +3pct, Germany, +2.5pct, Eurozone, + 2.4pct , USA, +2.3pct, France, +1.8pct , UK + 1.8pct, Japan, +1.7 pct, Italy, +1.6pct.

The Conference Board’s US index of leading economic indicators (LEI, chart below reported on November 20, 2017) rose by the highest percentage since 2013 (beating expectations). According to the Conference Board, this report “suggests that solid growth in the US economy will continue through the holiday season and into the new year.” It’s happening! Just click on the index link above to get the latest report from 25 January which shows growth continued in December and now the Conference Board expects it to continue for another 6 months!

Source: WSJ-The Daily Shot 21Nov2017

Now try to imagine the growth leverage esp. for manufacturing leaders (Germany, Italy and Japan of the G7) if the USA successfully grows by 3pct and the global economy by 3.9pct (IMF estimates) in 2018!


The Eurozone consumer confidence hit the highest level since 2000! It has been pretty much negative since the Dot.Com bust! This is like a miracle!

Source: WSJ-The Daily Shot

The leading indicator for measuring European growth prospects might very well be the Euro currency! If the euro continues to strengthen (below – 25JAN2018), the ECB could delay its QE exit/Rate differentials say that the euro should be much weaker, whereas economic growth differentials point to further upside for the euro…


Source: WSJ-The Daily Shot / Oxford Economics

Economic growth differentials, however, point to further upside for the euro, where European growth can be underpinned by an economic revival in Spain, Italy and France

Source: WSJ-The Daily Shot / Oxford Economics

A stronger Euro could very well curb this trend below in Germany…

Current Account Balances G7 – Germany a Little too Strong?

Source: @acemaxx, @Lagarde, @markets; Read full article / WSJ The Daily Shot

…and Pension Funds esp. in the USA keep having to re-balance their portfolios due to the re-valuation of their equity holdings which creates an ongoing demand for bonds keeping the rate differential within bounds. Easy money via low interest rates prevails!

The next WirtschaftsWunder – Economic Miracle – Europe takes the lead?

Spain continues to outperform its peers on growth. The interest rate spread narrows as well between Germany and Spain.


Source: @gadfly; Read full article / WSJ-The Daily Shot                              Source: WSJ-The Daily Shot

France catches up, gains momentum, next Italy and Spain?

French economic output and Employment indices from Markit (blue line)

 Source: @Markiteconomics; Read full article

The Eurozone GDP-per-capita growth lags other economies (see the potential for Italy and Spain). Is this about to change?

Source: Haver Analytics, OECD, WSJ-The Daily Shot

The January 2018 PMI figures suggest a strong start of the year for the euro area businesses.

The euro area composite PMI:

Source: @MarkitEconomics; Read full article / WSJ-The Daily Shot
Source: @WilliamsonChris; Read full article / WSJ-The Daily Shot

German Ifo Business Climate Index: Up, up and Away! The locomotive keeps on pulling! This can be considered a real confirmation of Germany’s and Europe’s growth potential!

“Sentiment among German businesses was very strong going into the year. The ifo Business Climate Index rose to 117.6 points in January from 117.2 points in December. This was due to far better assessments of the current business situation, with the sub-indicator hitting a record high. Business expectations for the next six months, by contrast, were slightly scaled back, but remain at a high level. The German economy made a dynamic start to the year.”

 Image Charts


 Here is a forecast for the real GDP and the debt-to-GDP ratio in Italy, France, Germany and the Eurozone.

Source: @Breakingviews, @LJucca; Read full article / WSJ-The Daily Shot

2018 starts with a lot of excitement on the global economic front. The sentiment at Davos has not been so positive in a long time. Some may fear this is truly a contrarian indicator. The original Imagine the Unimaginables was published on December 6, 2017 and sentiment was really 50:50 Bulls:Bears. As it gets more and more positive, so will the increase in bubble talk. As long as there is bubble talk, there is caution and therefore more climbing that “Wall of Worry”! Let’s see!


One Reply to “Unimaginable #3 Update: Europe Outpaces USA Growth -“New Global Contract” (Christine Lagarde, Head of IMF at Davos)”

  1. A comment from a London-based Brexit fan:
    “Yes I think Europe is moving from the Slow lane to the less slow lane but this regulatory tourniquet economy can never take off whereas Trump may be a nutter but he is really hitting into and sweeping away the regulatory excesses that have built up over years
    So in the end USA will grow much faster
    U.K. has the chance of a lifetime to sever all this bureaucratic crap now we are leaving the near communist regime of Brussels dominated Europe but I fear there is not a single politician here with the guts to make a bonfire of these deadly regulations
    Mifid 2 is 7000 paged of pointless and costly regulatory entanglement
    as to our negotiators I despair
    Who in the whole history of economics has offered to pay money to buy somebody else’s deficit
    That is a first
    I see German chamber of commence calculated it would cost just their motor and chemicals industry alone 13billion euros in duties if we adopt WTO trading
    Let’s do it then they might change their tune!”

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