Germany’s defense buildup is one of several signs Europe might be shaking off stagnation
ET
At the World Economic Forum in Davos two months ago, the mood around Europe was funereal. Its economy and markets had underperformed the U.S. for years. Now a newly inaugurated President Trump promised to sledgehammer Europe with tariffs while juicing U.S. growth with lower taxes, less regulation and cheaper energy.
As usual, the Davos consensus got it wrong. Since then, the moods across the Atlantic have switched places. European stocks are up nicely, while the American market has had a correction (a 10% drop). On Wednesday, Federal Reserve officials revised their outlook for inflation up and for growth down. The dollar, which shot up after Trump was elected, has sunk.
Some perspective is in order. A market reversal was overdue; the valuation gap between European and American stocks was becoming absurd. Even with revisions, the U.S. is still likely to grow faster than the European Union and Britain this year. Business activity indicators in Europe remain weak.
Yet a more fundamental reappraisal of the two regions’ prospects might be in order, and it has a lot to do with Trump—though not the way most expected.
U.S. growth prospects have actually slipped since Trump’s arrival. In January, economists expected growth of 2.2% annualized in the current quarter. Now, estimates are around 1% to 1.5%. On Wednesday, Fed officials lowered expected growth this year to 1.7% from 2.1%.