Europe’s summer surprise: A stronger economy

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Europe’s government-debt crisis helped send global financial markets plummeting in May.
Now, the surprise of the summer is that the continent’s economy hasn’t fallen off a cliff. In fact, it’s showing unexpected strength.

New data to that effect Thursday helped send major European stock markets sharply higher, which set the stage for the U.S. market’s big rally.

The German stock market jumped 2.5%, its biggest one-day gain since May 27. The French market surged 3.1% and Spanish stocks gained 2.6%.

On Wall Street, the Dow Jones industrial average rose 201.77 points, or 2%, to 10,322.30, bolstered by strong quarterly earnings reports from companies including AT&T, Caterpillar and UPS.

In Europe, Markit Group said its business-activity index that tracks both the manufacturing and services sectors in the euro-zone countries rose unexpectedly this month to its highest level since April -- just before the debt crisis mushroomed.

The index suggests “the euro-zone economy looks to have enjoyed a surprisingly strong start to the second half of the year,” Markit Chief Economist Chris Williamson wrote in a report.

The credit goes to Germany and France, which have “continued to provide the main stimulus to euro-area growth,” Williamson said. For the moment, that’s more than compensating for weakness in Greece, Spain and other economies suffering the biggest fallout from debt woes.

It also has helped that Greece, Spain and other countries at the center of the debt crisis have been able to sell new bonds in recent weeks to refinance themselves, taking some pressure off the financial system as a whole.

Separately on Thursday, a report from the European Commission showed that consumer confidence in the euro-zone countries rose this month to the highest level since May 2008.

The upbeat data drove the euro to $1.289, up from $1.275 on Wednesday. The currency has been making a run at $1.30 over the last week, continuing the rebound that has lifted it from a four-year low of $1.19 in early June.

The euro’s recovery has been good for U.S. investors in European stocks. A Bloomberg index of European blue-chip issues shows the average stock is up 4.6% this month in euro terms -- but the gain in dollars is 8.8%, compared with the Dow’s advance of 5.6%.

Still, as with the U.S. outlook, many analysts doubt that Europe can generate accelerating economic growth in the second half of the year, particularly with governments pledging more spending cuts and tax increases to ease debt fears, and with bank lending still restrained.

“The question is whether sufficient demand growth can be sustained to support orders and production growth at the current pace,” said Carl Weinberg, chief economist at High Frequency Economics, in a report Thursday. “Without a drive from either real income or credit growth, we do not see how that is possible.”

In the meantime, the next big test for the euro and European stock markets will come Friday, when bank regulators will reveal the results of their “stress testing” of bank balance sheets -- an exercise aimed at rebuilding financial-system confidence damaged by the debt crisis.

The concern all along has been that regulators would make the stress test too easy. As Simon Kennedy at MarketWatch.com notes, results that show a string of banks with failing grades could actually be a confidence-builder, because that would suggest that the test had some real teeth.

-- Tom Petruno