Position: Long Germany (EWG)
In our post “Bear Cubs” on 10/1 we discussed rising unemployment as a headwind facing the Eurozone into year-end. On further reflection however, we think that it is worth considering that European economies may better weather a rise in unemployment than their global counterparts.
It’s a question worth qualifying and quantifying as a rise in joblessness has a potential to ripple through a country’s and a region’s economic performance. If you’ve been following our US strategist and food industry analyst Howard Penney’s research, you’d know we’ve struggled to make a case for resurgence in the US consumer, especially concerning discretionary spending like casual dining. Conversely our Retail team has become incrementally more bullish, highlighting in our call this morning that a slow and gradual recovery in underway, supported by better sales, tighter inventories, and favorable compares that led to several upside earnings revisions in the September numbers. Could the outlook of the European Consumer differ in appearance?
Though we’ve cautioned against speaking about Europe in aggregate due to the divergence across countries on multiple factors, one aspect that much of the region shares collectively is a significantly stronger foundation of social services than those available to US citizens, and certainly greater than the safety net provided by governments in developing economies like China. One take away to note here is—without a job the fear of losing (for example) healthcare benefits and the inability to pay for comparable services is far greater in the US or in China (where all expenses are out of pocket), than in Europe due to government social programs, a comment astutely made by my colleague and Asia strategist Andrew Barber.
Secondly, it’s worth considering savings rates that may better pad one’s economic outlook. As our European clients on the ground have so eloquently compared European to American spending: “Americans spend everything they have.” If this translates to on balance Americans having less cash reserves to fall back on in a weaker economy with tight access to capital, could it be that European sentiment, and therefore consumption, is more resilient in the face of adversity than that of Americans? Could a more cushy savings account and social network lead to increased optimism? The chart below of unemployment levels in the US versus Eurozone over the last ten years speaks to the point that Europeans are more accustom to a higher jobless rate than Americans.
As we measure the impact of rising unemployment in Europe, we keep in mind the vast divergence in joblessness among European countries—Spain is pushing 19% unemployment while Germany has hovered around the 8.2% level. While comparing the structural nature of Spain to Germany is far from comparing apples to apples on numerous counts, we do believe that the sequential rate of change in many of the fundamental metrics we follow in Europe will slow over the next months.
But the reality remains, a jobless recovery in Europe may actually be more bullish than in the United States.