The euro zone retreated deeper into recession in the final quarter of last year and economists predict little or no growth until 2014.
Analysts were braced for a decline in growth across the single-currency zone, but GDP fell by 0.6 per cent during the fourth quarter, not only worse than expected but also the weakest reading since the depths of the financial crisis in March 2009.
The shock waves could also be felt by regional economies, economists warned yesterday.
"Continued weakness in euro-zone growth is significant for North African economies such as Morocco, Tunisia and Egypt, which have very strong linkages with continental Europe," said Raza Agha, the chief economist for the Middle East and Africa at VTB Capital. "The external sectors in all of these countries are extremely dependent on what happens in Europe at the moment."
Forecasters pointed to "a further deterioration in economic activity and labour markets in the euro area", the European Central Bank (ECB) said in its latest survey, which cut inflation estimates to 1.8 per cent for the next two years.
"Real GDP growth expectations were also revised downwards and unemployment expectations were revised upwards for 2013 and 2014." Germany's economy fell 0.6 per cent during the fourth quarter as industrial production faltered and a strong euro hampered exporters, paring expansion during the first three quarters of the year.
The decline was mainly because of the "comparably weak German foreign trade", the country's statistics office said.
France's economy contracted 0.3 per cent during the same period for the first time since the second quarter of last year after briefly exiting recession during the autumn.
Meanwhile, Italian GDP declined 0.9 per cent, the country's sixth consecutive quarter of declines.
The data release "provides a pretty bleak picture of the state of the euro-zone economy at the end of last year", analysts from Capital Economics wrote in a research report.
"Survey indicators have pointed to an improvement in the early months of this year. But for now at least they are not strong enough to suggest that the euro zone has pulled out of recession."
The poor results in the survey from the currency bloc came after Japan released figures showing its economy also unexpectedly shrank during the fourth quarter, giving the country's new government scope to press ahead with bond-buying plans.
Although concerns about the public finances of Italy and Spain have receded following the ECB's announcement in September that it was ready to deploy its unlimited financial firepower to keep the euro zone intact, the euro has risen sharply since then.
The currency has advanced 10.2 per cent against the US dollar since bottoming out last July, weighing down European exporters including Germany, which has until now been able to avoid a contraction of its economy.
European equity markets slid on the news, with the Stoxx 600 index falling 0.6 per cent to 286.89 in midday trading.
But the euro took a beating against other reserve currencies, falling more than 1.1 per cent against the US dollar and sliding 1.29 per cent against the Japanese yen.
The British pound also lost strength yesterday, falling to an eight-month low of US$1.5498.
ghunter@thenational.ae
Dubai World Cup Carnival card
6.30pm: Al Maktoum Challenge Round-2 Group 1 (PA) US$75,000 (Dirt) 1,900m
7.05pm: Al Rashidiya Group 2 (TB) $250,000 (Turf) 1,800m
7.40pm: Meydan Cup Listed Handicap (TB) $175,000 (T) 2,810m
8.15pm: Handicap (TB) $175,000 (D) 1,600m
8.50pm: Handicap (TB) $135,000 (T) 1,600m
9.25pm: Al Shindagha Sprint Group 3 (TB) $200,000 (D) 1,200m
10pm: Handicap (TB) $135,000 (T) 2,000m
The National selections:
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UAE currency: the story behind the money in your pockets
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
