Eurozone economy remains resilient

August saw the MSCI Europe excluding UK index decline by 2.2% in euro terms although there was a marked divergence in the performance of individual countries on the continent.

Ireland, for example, performed particularly poorly, partly because of a sharp fall in the share price of building materials company CRH Holdings. The group, which makes up more than 20% of the ISEQ index, announced disappointing interim earnings towards the end of the month.

Although European investors were buoyed by some positive economic data, looming signs of slowing economic growth from other major powers ensured that, on balance, investor sentiment deteriorated. Nevertheless, a flurry of merger and acquisition activity, including a bid for US biotech company Genzyme by French pharmaceutical group Sanofi-Aventis, provided a welcome distraction for investors.

The eurozone’s economy grew at its fastest rate in four years during the second quarter of 2010. European economic growth had gathered strength after the Greek debt debacle, boosted by promising signs of growth in the global economy. However, indications of cooling growth in China and a slowdown in US economic expansion proved detrimental to investor sentiment, which remains vulnerable to bad news from other leading economies around the world.

European inflation posted an annualised increase of 1.6% during August, having increased by 1.7% during July. Unemployment remained high as European companies continue to cut costs in order to safeguard their profits. During the month, investors became more optimistic the European Central Bank would provide support for banks in the eurozone for longer than originally expected.

In France, the government reduced its forecast for domestic economic growth in 2011from 2.5% to 2%. However, Germany achieved record economic growth during the second quarter of 2010, spurred by export activity and investment. Consumer spending in Germany registered growth of 0.6% while the Bundesbank increased its forecast for economic growth in Germany next year from 1.9% to 3%

Nevertheless, according to the ZEW Centre for European Economic Research, investor confidence in Germany fell to a 16-month low during August, suggesting investors anticipate a slowdown in the rate of economic growth as demand for the country’s exports starts to ease.

According to the European Commission, confidence in the economic prospects for the region reached its highest level for more than two years, boosted by strong export activity. Even so, European investors might find export activity starts to decelerate if overseas countries reduce spending to help cut their budget deficits.