As we mentioned in our last piece (“Europe: Waiting for Godot?”), Europe is attempting to strike a delicate balance to create sustainable economic growth despite structural headwinds. In addition, multiple divergence themes globally and in Europe in a fragile economic context could possibly hinder its revival.
The attacks on the French capital this weekend can possibly be an additional headwind to economic growth in Europe. Although the full impact is still hard to assess it is fair to say that the potential geopolitical and macroeconomic consequences related to the events should not be ignored.
Framework: before the Paris attacks Recent data on European growth provide evidence for the delicate balance the region is trying to strike. Third-quarter 2015 economic growth was up 0.3% versus +0.4% in the previous quarter. The environment for pricing was also weak, even in Spain, where the current context is somehow better than in most countries in Europe. The slowdown, led by Germany, was also witnessed in Italy, Greece, Finland and Estonia.
From a geopolitical standpoint, it is clear that although unified in their long-term goals, members of the global community have taken different paths with regard to its intervention in the Middle East, especially where Syria is concerned.
The attacks in Paris over the weekend took place in the aftermath of those in Turkey, Beirut and of the fall of the Russian plane in Sinai last month. Will those trigger a turning point both from a geopolitical and macro economic perspective?
Economic Impact It is difficult to pinpoint exactly when, but there is a point in the public psyche where a succession of isolated events link together to create a pattern. Although it is not clear as yet to assess if this is happening, it is possible that the weekend events in Paris triggered such a linkage. This of course could have a negative impact on sentiment and in turn on economic growth at a time when global growth is fragile.
The exact impact, both from a timing and a magnitude perspective, of such a shift is always difficult to measure exactly. Looking at the September 11th attacks in the US in 2001, the impact on the US economy was measured and estimated to have been 0.5% of GDP (with an annual economic growth forecasted at the beginning of the year of 3%)*.
In addition to domestic consumer and business sentiment, one area that is worth looking at to understand potential economic impact of recent events is tourism. If one includes services attached to travel – i.e. hospitality, car rentals, entertainment, transports, meetings and conventions - tourism has been a relative bright spot for the global economy in the last few years.
In 2014, the value of travel and tourism as an industry was about US$ 7.6 Trillion **, or 10% of the world’ s economy. This represented 277 million jobs (or 1 in 11). International tourism continued to grow in recent years, reaching about 1.1billion visitors. Over 45% of visitors in 2014 come from emerging markets compared to 38% in 2000. A large part of the growth is linked to the emergence of the growing Chinese Middle class.
Looking at Europe, and France in particular, the total contribution to GDP is meaningful - at approximately 9%. For France, with approximately 84 million tourists a year, the country is one of the leading destinations in the world and ranks number 6 globally with regard to total contribution to GDP, at approximately US$ 255bn in 2014 versus the world’s average of US$ 58bn. The UK and Germany were also important beneficiaries of tourism with total contribution to GDP of 301bn and 343bn respectively during the same period. In France, tourism’s total contribution to employment is 2.7 million jobs, or just shy of 10% of employment. The industry also represents close to 7% of total French investment. No need to say that the potential impact of a severe decline in visitors would impact the French economy.
Geopolitical Implications The timing of the latest attacks – while the G20 meets in Turkey - provides an opportunity for world leaders to possibly increase coordination faster than most expect. A coordinated response, and possibly a reinforcement of an alliance between the major blocks that was not, optically at least, optimal, might now be possible.
The G20 has already said it wanted to target terrorism financing with the coordination and sharing of information and will accelerate the set up of a financial action taskforce. With regard to the Syrian civil war the G20 has also adopted a timeline to help opposition groups to draft a constitution and elect a government by 2017, with the hope of a ceasefire taking place in the next 6 months.
From an investor standpoint this could means more direct military involvement in the Middle East as well as increased defense budgets globally, and possibly the need for some fiscal relaxation when compared to the past few years. Politically speaking, it also means more polarization within Europe with extremist parties leveraging the recent events to “build their case”. Soon after the Paris events, Poland and the Czech republic clearly voiced their heightened disagreement of the European policy with regard to the refugee crisis.
Currency markets will also be impacted, as the Yen and the US Dollar are generally the preferred “safe” currencies in times of increased volatility. Interestingly, and following much debate since the last financial crisis, the RMB has just been accepted by the IMF as a reserve currency into the SDR.
Conclusion Ultimately, in a low growth low inflation world, the recent attacks might be a turning point for Europe and the Western World as it is fighting two wars.
First an economic war as the G20 is struggling to keep its collective GDP in shape. Key long-term structural issues such as anti-corruption, youth unemployment, more modern international tax systems and maintaining the stability of the global financial system will remain top priorities. In a fragile growth environment any sudden weakness in business or consumer confidence could have an important impact. Second its war against terrorism. The weekend’s events might be a defining moment that could bring more volatility as we possibly enter a new phase of coordinated involvement.
SOURCES * "The Macroeconomic Impacts of the 9/11 Attack: Evidence from Real-Time Forecasting" - by Brian W. Roberts, PhD, Senior Economist, Office of Immigration Statistics, Department of Homeland Security ** World Travel and Tourism Council - Bryan W. Roberts, PhD
ABOUT THE AUTHOR
Virginie Maisonneuve Managing Director
Virginie is founder and Managing Director of Maisonneuve Global Advisors. Virginie’s background in asset management spans over 28 years and she served most recently as CIO-Equities, MD at PIMCO (London). Prior to this she worked as Head of global equities at Schroders (London), Co-CIO at Clay Finlay (New York) and held various senior portfolio management positions at State Street Research (San Francisco), Batterymarch (Boston) and Martin Currie (Scotland). She started her career as a consultant for the French Ministry of Foreign Affairs in Beijing (China).
Virginie has an MBA from ESLSCA (France) and a BA from Dauphine University (Mandarin Chinese). She also has a first degree diploma in Political Economy from People's University (Beijing, China) and is a CFA Charterholder.
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