Europe's economy strong -- Hedge against U.S. weakness

April 18, 2007

The International Monetary Fund (IMF) forecast that Europe will grow faster than the U.S. in 2007, thanks to 5-10% growth in emerging market countries such as Russia, Turkey, and the Czech and Slovak Republics. With these countries included, the European economy is projected to grow 3.4% in 2007, down only slightly from a 3.7% growth rate in 2006, and up significantly from a 2.7% growth rate in 2005.

The European Union (EU) will grow more slowly, at 2.8% in 2007, although still faster than the U.S. The Euro area alone will grow 2.3%, slightly faster than the U.S.

What Europe's strong economy means:

By taking the difficult steps needed to integrate its diverse economies and cultures, the European Union has exported its benefits to the entire region. Within the EU, companies have benefited from lower tariff and exchange rate transactions, and can pass those savings onto consumers in lower prices. These companies also benefit from lower labor costs in the developing countries both within and adjacent to the EU.

Developing countries within the EU have equal access to the markets of the developed countries, while adjacent countries have better access than they have had in years. As per capita incomes increase, residents of these countries are creating more demand for the developed countries’ products.

The growth of this larger European market makes these countries’ economies less dependent than South America or China on the U.S.

Action steps:
Make sure you keep an allocation of European funds in your portfolio. Perhaps shifting your allocation from Canadian, Mexican, U.S. and Latin America funds to European would provide a hedge against the declining U.S. housing market.

Source: IMF, “Press Briefing on Economic Outlook and Issues in Europe”, Michael Deppler, Director, European Department, April 14, 2007.

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