Businesses in Europe said a weak euro, cheaper oil and the European Central Bank’s easy money policies drove a continued improvement in profitability in the second quarter, encouraging some companies to invest and hire more.
Chief Executives of some of the biggest U.S. and European companies told investors in recent weeks the region was experiencing a sustained recovery, helped by a turnaround in southern Europe, which had been a drag for years.
“Europe has come back to growth this year,” Ivan Menezes, Chief Executive of drinks maker Diageo Plc (DGE.L) told investors last week.
With China’s economy weakening and a strong dollar making U.S. exports less competitive, Europe has even become an outperformer for some.
“It was the bright spot,” said Nick Fanandakis, Chief Financial Officer at DuPont (DD.N). “It was somewhat of a surprise,” he added. In volume terms, Europe had been the chemicals group’s best performing region in the quarter, CEO Ellen Kullman said.
Truck maker Scania, a unit of Volkswagen AG, said its orders rose 41 percent in the second quarter in Europe, compared to the same period last year, while U.S. rival Paccar Inc (PCAR.O) said orders at its European unit, DAF, were 60 percent higher in the quarter, as growing freight traffic — a key economic indicator — drove sales.
Strengthening customer demand allowed companies including Swedish lock maker Assa Abloy (ASSAb.ST) , packaging maker Smurfit and dairy group Danone (DANO.PA) to raise prices or lift margins.
Even companies which have still not returned to their pre-financial crisis health, like General Motors, whose European operations are still loss making, said they were increasingly confident the worst was past.
”For me it was very, very promising and very optimistic based on the results in the second quarter,” said Chuck Stevens, the U.S. carmaker’s CFO.
Weaker euro, lower interest rates
Dutch-headquartered staffing group Randstad said increased business activity was feeding through to hiring. CFO Robert van de Kraats told Reuters last week that current labor demand was “consistent with the early phase of a cyclical recovery”.
Jonas Prising, CEO of Milwaukee-based rival Manpower (MAN.N) , echoed other companies in highlighting “very strong performance” in southern European.
Prising said the situation in Europe's economy — which grew at a little over half the rate of the United States last year — now was “not unlike the recovery we saw in the U.S. following the great recession”.
Europe is benefiting from a range of factors.
The euro has fallen sharply this year, as Greece’s future in the single currency became increasingly uncertain. Down to the wire bailout negotiations, which led to a run on Greek banks and the imposition of capital controls in the country, saw the euro hover near 12-year lows against the dollar in the quarter.
The euro's weakness has made Eurozone manufacturers and services providers more competitive outside the bloc and better able to compete against imports internally.
Analysts at UBS predicted last week that the currency boost to earnings in the quarter would be the biggest in close to 20 years and industrial groups Daimler AG, Siemens AG and Peugeot SA all highlighted the boost from a weak euro in calls with investors.
The increased exports have also supported logistics firms including UPS (UPS.N) and Kuehne & Nagel International AG, which said they had added new services that were capitalizing on strong demand.
Lower oil prices represented another boost, cutting costs for companies such as Peugeot or allowing others, such as Thomas Cook (TCG.L), to pass on lower prices to customers.
Companies including HeidelbergCement (HEIG.DE) , Daimler, and Siemens (SIEGn.DE) also credited the ECB’s decision to inject masses of liquidity into the economy, which led to low interest rates and customers’ easy access to credit, with driving demand.
Greece shrugged off
Carlos Tavares, CEO of Peugeot (PEUP.PA), said the “tailwinds” of currency, credit and lower energy costs had left his company struggling to meet consumer demand in the past few months.
“We started the year with a very low expectation in terms of volumes and we didn't produce enough cars. In the Q2 we really pushed the accelerator to the highest possible level,” he added.
Few CEOs reported concerns about the crisis in Greece.
The country is a small market for international companies but some economists predicted fears of economic contagion from a possible Greek economic collapse could weigh on big companies by making consumers and businesses elsewhere in Europe reluctant to spend and invest.
But executives reported few if any signs that customers were spooked into postponing buying decisions.
Jamie Dimon, Chief Executive at JPMorgan Chase & Co. (JPM.N), said CEOs had also not been deterred from pressing ahead with big strategic decisions.
“We don't think Greece has affected the M&A (mergers and acquisitions) dialogue very much,” he said last month.
“European companies coming to America and American companies going to Europe … those conversations continue” he added.