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By Robert Dishner
… but spending on tourism could keep inflation elevated.
Europe has a particularly export-oriented economy. Before the pandemic (4Q19), exports of goods and services from the euro area totaled 47.4% of nominal GDP compared to just 11.6% for U.S. exports.
Moreover, China has grown in importance as a destination for European exports – suggesting that its reopening could help regional growth. This could be a mixed blessing, as explained below.
About two-thirds of European exports, as reflected in GDP, are goods. In the 12 months through November 2022, 8% of them went to China and Hong Kong, versus 15.7% to the U.S. Compare that to November 2002, when China and Hong Kong accounted for just 4.2% and the U.S. received 17.3%.
That said, exports to China and Hong Kong have averaged just 4% growth since the start of the pandemic, compared to 6.3% in the five years prior.
According to the European Automobile Manufacturers’ Association, 13 million people in the European Union were employed in the automotive industry in 2020, or 7% of the workforce.
China, meanwhile, was the third-biggest destination for EU passenger cars, with 410,917 units, behind the U.K. and the U.S. That compares to an average of 445,248 in the three years prior to the pandemic.
In addition, the U.N.’s World Tourism Organization estimates that 2022 European international tourist arrivals were 21% below 2019 levels, while China tourism expenditures were down 57% versus 2019 on a global basis.
The China Outbound Tourism Research Institute showed that 6.7 million Chinese visited France, Germany and Italy combined in the year ended 2019 compared just 226,000 in the four quarters ended in September.
What all this tells us is that, as China reopens, European exports and tourism could benefit. From a policy perspective, a key concern would be if an influx of tourist spending kept services inflation at unacceptably high levels.
While services inflation eased to 4.2% in January from 4.4% in December, restaurants and hotels have been experiencing over 8% inflation since July 2022.
We think the trade-off for Europe is, on balance, a positive; but again, it reinforces the view that policy rates in Europe and elsewhere could remain higher for longer than many investors think.
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