Germany's, France's return to growth is good news for investors

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More good news for investors: On Tuesday, Eurostat, the EU's statistic office, announced that the euro-zone economy barely contracted in the second quarter with GDP dipping just 0.1 percent. These encouraging numbers were propelled by a promising Germany and France, both of which unexpectedly returned to growth.

Economists surveyed by Bloomberg News had expected Europe's euro-zone economy to contract 0.5 percent in the second quarter after a large 2.5 percent contraction in the first quarter. This isn't entirely surprising; in the 27-nation European Union, which includes nations that do not belong to the euro monetary system, GDP declined 0.3 percent in Q2 after a 2.4 percent decline in Q1.
Following the news, the euro rose against the dollar, strengthening by one cent to $1.4284.

The positive second quarter euro-zone GDP data took most economists by surprise. Most had forecast that the United States would be the first major economic region to return to GDP growth, based upon the theory that, since the U.S. entered the recession earlier, it would recover sooner.

The euro zone's recovery is being propelled by Germany. In the country, Europe's largest economy, GDP increased 0.3 percent in Q2, following a 3.5 percent swoon in Q1. Economists view the $2.86 trillion German economy as critical to regional growth, as it accounts for a disproportionate share of the continent's manufacturing output and business investment. The improving economic conditions are also expected to boost the re-election hopes of Chancellor Angela Merkel, who is campaigning for a second term, with the country's national election scheduled for September 27.

Meanwhile, France's GDP also increased 0.3 percent in Q2 after a 1.3 percent decline in Q1. "After four quarters of negative growth, France is finally coming out of the red," France's Economic Minister Christine Lagarde told RTL radio Thursday. "France is clearly distinguishing itself from its neighbors."

Other Q2 GDP growth rates in the euro-zone were as follows: Italy, down 0.5 percent, after a 2.7 percent decline in Q1; Greece, up 0.3 percent, after a 1.2 percent decline; and Portugal, up 0.3 percent, after a 1.8 percent decline.

So much for the economic theory of "first in to the recession, first out of it." The Q2 euro-zone GDP data provides evidence that the European expansion is underway. Recession time lines aside, one can construct a credible argument as to why Europe emerged from recession ahead of the U.S. First, Europe was not hit as hard by home mortgage foreclosures and related bond defaults. Second, Europe's broader social support system prevented the wholesale disruption of lifestyles and household formation declines that are typical of U.S. recessions, which means demand wasn't hit as hard. In sum, Europe's economic foundation is more-solid than the United States', and the result has been a quicker snap-back in GDP.

Europe's economic growth is good news for investors. Due to decreased consumer spending in the United States, other major economic regions (Europe, China/Asia, Brazil/Latin America) must increase both consumer spending and commercial activity and serve as growth engines for the global economy. Without those growth engines outside the U.S., the global economy will not be able grow at an adequate rate.
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