The International Monetary Fund (IMF) expressed concern over stagnant growth in the Eurozone in its latest global economic outlook. IMF believes the Eurozone faces a 1-in-3 chance of slipping back to recession in the near future. This is the third time IMF downgraded its global economic growth forecast this year, citing weakness in the Eurozone to be one of the primary reasons for the slowdown.
Eurozone Economy Losing Steam
According to the IMF, the Eurozone’s probability of re-entering a recession in the next six months has nearly doubled to 38% since April. This is more than rest of the world’s chance of 33%. IMF believes there is a 40% chance of the Eurozone falling into recession in the next 12 months. There is also a 30% possibility of the Eurozone sliding into deflation during the same period.
To top it off, there is a 30% chance that consumer prices might drop between this month and June of next year. IMF stated inflation in the Eurozone has moved south, “indicating risks of outright deflation or a protracted period of very low inflation.”
Additionally, IMF expects the Eurozone’s GDP to grow a meager 0.8% in 2014. This is way below the U.S. and Britain’s projected growth rate of 2.2% and 3.2%, respectively. IMF predicts that the Eurozone’s three largest economies – Germany, France and Italy – are poised to enter their third successive year of recession. Let’s take a look at these economies’ recent progress:
Major Economies Look Weak
Germany: An unexpected decline in German industrial output during the month of August is the latest indication that outlook for Europe’s largest economy is worsening. Last Tuesday, data from the country’s economy ministry showed industrial output plunged 4% in August.
According to FactSet, this is the biggest drop in industrial output since 2009. The data came in after factory orders decreased by 5.7% in August, the biggest fall since 2009.
Last Thursday, the Federal Statistics Office reported that exports in Germany plunged 5.8% in August, registering its biggest drop since early 2009. This disappointing data increased fears about recession in Europe’s biggest economy.
German business confidence also took a beating after the Business Climate Index produced by IFo dropped to 104.7 in September for the Eurozone, touching the lowest level since Apr 2006. Separately, Markit’s retail purchasing managers’ index (PMI) showed Germany’s retail sector scored 47.1 in September, worst level in the last 53 months.
France: The Eurozone’s second largest economy witnessed declines in both manufacturing and servicing activities in September. Markit’s overall purchasing managers’ index, which includes both manufacturing and services sectors, was at 48.4 in September, signifying contraction. Markit’s retail purchasing managers’ index showed France’s retail sector too posted an 18-month low score of 41.8 in September.
Italy: The Eurozone’s third largest economy saw improvements in manufacturing activity but registered declines in servicing activity last month. The Markit/ADACI Business Activity Index for the service sector in Italy dropped to 48.8 in September from 49.8 in August. The index contracted for the second month in a row in September.
Weaker Bourses
The benchmark DAX 30 index slipped 1.3% on Tuesday following Germany’s dismal industrial output report. The index tanked almost 8% year-to-date and is on track to post its first yearly loss since 2011. France’s CAC 40 is also down 5.2% year-to-date. Separately, the Italian FTSE MIB gained 1.2% year-to-date. However, since last Tuesday, the index lost 4%.
To put things in perspective, the Stoxx Europe 600 Index has entered the negative territory. The index has moved down 1.7% this year. Last week turned out to be the worst week for the index since May 2012. The index posted a 4.1% weekly drop.
Gloomy Outlook
The Eurozone’s business expanded at the slowest rate this year in September. The final composite PMI for the Eurozone touched a 10-month low of 52, last month. Chris Williamson, chief economist at Markit, said: “The PMI suggests the Eurozone economy remained stuck in a rut in the third quarter.”
Another survey by Sentix, showed investor sentiment in the Eurozone was negative 13.7 in October, hitting the lowest level since May 2013. Sentix said: “While expectations were only just below the zero-mark in September, they are now clearly in negative territory and that means a technical recession in the Eurozone – two consecutive quarters of contraction – is ever more likely.”
European Central Bank (ECB) continued to keep key interest rates unchanged and decided to buy assets for a minimum of two years.
3 Stocks to Sell Now
Given the disappointing economic scenario in the Eurozone, it will be a prudent idea to stay away from the following stocks:
Eni SpA (E) is involved in the oil and natural gas exploration, and field development and production activities. The company is based in Rome, Italy. In the past two months, the Zacks Consensus Estimate for the current year was revised 3.7% lower.
Current year expected earnings growth rate for this Zacks Rank #4 (Sell) stock is negative 2.5%, in contrast to the industry growth rate of 13.8%. The stock lost 13.5% in the last four weeks. It has a Zacks Industry Rank in the bottom 30%.
SAP SE (SAP) provides enterprise application software and software-related services worldwide. The company was founded in 1972 and is headquartered in Walldorf, Germany. In the past two months, the Zacks Consensus Estimate for the current year was revised 1.1% lower.
This year’s expected earnings growth rate for this Zacks Rank #4 (Sell) stock is a negative 12.2%, in contrast to the industry growth rate of 4.8%. The stock lost 11.2% in the last four weeks. It has a Zacks Industry Rank in the bottom 41%.
Sanofi (SNY) researches, develops, manufactures and markets healthcare products. The company was founded in 1970 and is headquartered in Paris, France. Over the past two months, the stock has seen the Zacks Consensus Estimate for the current year moving 1.4% lower.
Current year expected earnings growth rate for this Zacks Rank #4 (Sell) stock is a meager 1.3%. The stock lost 7.1% in the last four weeks. It has a Zacks Industry Rank in the bottom 17%.
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