Europe's challenge
Can continental Europe buck the trend? Problems in the US and UK banking and housing sectors seem to have wreaked less havoc in the eurozone. Business conditions remain reasonably robust and exports have held up well in spite of the appreciating currency. The manufacturing export orders index, though, is falling and is below its long-run average. Even if exports to the US slow, they account for only 2.4 per cent of eurozone gross domestic product. As Morgan Stanley points out, assuming US imports fell twice as fast as US GDP, a one-point reduction in US growth would cut eurozone growth by just 0.05 per cent. Europe's economy, however, will suffer more from continuing tightness in the money markets. The European Central Bank has managed to narrow the spread between its refinancing rate and the rate at which banks lend to each other. Outstanding loans to the private sector are still growing fast - at more than 11 per cent year on year in October - but this may signify increased recourse to bank lending as the commercial paper market dried up. In addition, according to the ECB's bank lending survey, banks appear to have switched their efforts from increasing the volume of their loan books to increasing its quality. Consumer spending in the eurozone has not been as fueled by borrowing as in the US and UK and it is the corporate sector that is the more (relatively) indebted. Thus higher borrowing costs will first be felt in slowing investment rather than consumption.
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