Trichet
Jean-Claude Trichet's European economy may be reaping the rewards of risk aversion.
As the U.S. teeters on the brink of a recession after the end of a five-year housing boom, growth in the 15 nations that share the euro is poised to outpace the American economy for a second straight year.
The region's resilience lets Trichet, who today presides over the European Central Bank's monthly policy meeting, focus on fighting inflation instead of cutting interest rates. Because Europeans save more than Americans and splurge less on houses and stocks, the continent is better placed to withstand the global credit squeeze without the need for lower borrowing costs.
“To be thrifty is a good thing and definitely a plus for the European economy in this tough period,'' said Jean-Michel Six, chief European economist at Standard & Poor's in London. “The attitude to debt and credit is clearly very different between the U.S. and Europe.''
U.S. growth will slow to 1.5 percent this year from 2.2 percent in 2007, according to the International Monetary Fund. The Washington-based fund forecasts the euro-area economy will expand 1.6 percent after 2.6 percent last year.
While that has pushed the euro to a record against the dollar, German companies have compensated by improving efficiency and reducing labor costs. Adidas AG, the world's second-largest sporting-goods maker, reported a 63 percent jump in fourth- quarter profit yesterday, and sports-car maker Porsche SE said March 4 that first-half profit rose 44 percent.
`Best Performance'
“We are seeing the best performance in years despite the exchange rates,'' ECB council member Nout Wellink said on Feb. 27. The euro has risen 16 percent against the dollar in the past year, reaching $1.53 for the first time yesterday.
Growth in Europe's service industries accelerated in February, unemployment fell to the lowest since records began in 1993 and business confidence in Germany, the region's largest economy, unexpectedly rose for a second month.
The economy's performance will allow the ECB to keep its benchmark rate at a six-year high of 4 percent today, said all 54 economists surveyed by Bloomberg News. The ECB announces its decision at 1:45 p.m. in Frankfurt and Trichet, 65, briefs reporters 45 minutes later. Inflation is running at 3.2 percent, the fastest since the euro's debut in 1999.
Contrast With Fed
The ECB's inflation-fighting zeal contrasts with the growth- oriented policy of the Federal Reserve. The Fed has cut its key rate by 2.25 percentage points as the U.S. economy reels from the worst housing recession in a quarter century. The slump has made banks reluctant to lend and caused credit markets to seize up in August free credit report online.
U.S. manufacturing shrank at the fastest pace in almost five years last month and in January U.S. home sales fell to the lowest level since records began.
The euro area isn't completely immune, given the U.S. is the second-biggest customer for its goods. German exports to the U.S. dropped 5.9 percent last year.
Spain, Ireland and the Netherlands may also be tripped up by housing busts of their own, while Morgan Stanley forecasts the Italian economy will slip into a recession this year.
“The economy seems set for a substantially weaker 2008,'' said Howard Archer, chief European economist at Global Insight Inc. in London, who predicts the ECB will start cutting rates in June. The central bank is likely to lower its forecast for 2008 growth to 1.8 percent from 2 percent today, Archer said.
Less Debt
Still, European consumers are more reluctant than their American counterparts to run up debt, and have more savings to support them when expansion falters.
European household debt amounts to 90 percent of gross domestic product, compared with 134 percent in the U.S., according to estimates by Six at Standard and Poor's. Consumers in Europe save about 14 percent of their disposable income; Americans' savings rate is about zero.
While lower debt means Europe's economy is less likely to benefit from market booms, it also helps it avoid busts.
“If you haven't borrowed then you're not really exposed to the debt cycle going wrong,'' said David Mackie, chief European economist at JPMorgan Chase & Co. in London.
Europe's resilience marks a change from 2001, when a U.S. recession dragged the economies of Germany, France and Italy down with it. Since then, European companies and governments have taken steps to overcome structural obstacles to growth.
35-Hour Week
Germany in 2003 cut jobless benefits for the first time since World War II and in France, President Nicolas Sarkozy has effectively scrapped the 35-hour working week. Companies such as Siemens AG and Daimler AG have forced staff to work longer for less pay.
Profit growth has accelerated since 2003 to about 6.5 percent, according to JPMorgan, encouraging companies to hire.
With exports to Asia and the Middle East also helping manufacturers cope with the stronger euro, Europe may come out of the credit squeeze in better shape than the U.S., said Klaus Baader, chief European economist at Merrill Lynch & Co. in London.
“The euro area is well placed to weather the storm,'' said Baader.