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EUROPE COULD BE THE BRIGHT SPOT FOR '99A tightening labor-cost squeeze. Plunging Asian demand. Little pricing power. Is there any oasis for U.S. corporations stuck in a profits desert? Try Europe, say some analysts. Demand across the Atlantic should at least match that of the U.S. in the coming year, and a falling dollar is expected to continue giving a lift to earnings brought back home. Moreover, the good news should carry farther than most, since Europe, which takes a quarter of all U.S. exports, is the biggest market for U.S. companies. Among the industries most likely to benefit: paper, information technology, and management consulting. ''RARE MOMENT.'' Certainly the fundamentals argue that Europe will be better off than most overseas markets for multinationals in 1999. For starters, Europe is set to grow at about the same pace in 1999 as the U.S. will. According to Goldman, Sachs & Co., the 11 nations who will adopt the euro in January should see their collective real gross domestic product increase by 2.1% in 1999. That should match U.S. growth, as projected by a survey by Blue Chip Economic Indicators. Both forecasts show economic activity slower than in 1998, but as Robert J. Barbera, chief economist of investment firm Hoenig & Co., says, ''We will enjoy a rare moment when Europe will match or surpass U.S. growth.'' Granted, some expectations have been trimmed back in recent weeks, particularly in Germany. The election of Chancellor Gerhard Schroder in September scared many German business leaders, who don't expect much tax relief under his government. Combined with the impact there of Asia's problems, that's expected to hold German GDP to 1.7% growth next year, says Goldman Sachs. Compared with the rest of the world, though, Europe is still a good customer. Global shipments of personal computers to Europe in the third quarter surged 22% from a year ago, while sales everywhere else rose just 9%, says market researcher International Data Corp. And with airlines such as United and Northwest Airlines Corp. shifting seats from Asian routes to Atlantic flights, total capacity over the Atlantic should increase 12% to 15% this year. Overall, U.S. merchandise exports to Europe have grown 4.6% so far in 1998, even as shipments to the rest of the globe fell 2%. In addition, multinationals should get a boost to their bottom lines if, as many expect, the dollar declines further against European currencies (chart). Since early April, the greenback is down 10% against both the German mark and the French franc. Expected interest-rate cuts in the U.S. suggest the dollar will slip further when the euro is introduced. Those declines lift the value of profits originating in Europe when companies exchange marks and francs into dollars. The currency translations won't entirely offset the falloff in Asian earnings, but they may soften the blow. Even if the dollar were to stabilize at current levels in 1999, B. Alex Henderson of Prudential Securities Inc. notes that companies should get as much as a 5% boost when European earnings are turned into dollars. And with overall profits expected to show little growth at all next year, companies will welcome positive news anywhere they can get it.
By Kathleen Madigan in New York
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Updated Nov. 12, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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