Europe posted anemic GDP growth in the second quarter of 2011, but the continent can still avoid a double-dip recession if European governments could solve a few problems. First is high unemployment which is having a direct effect on consumer spending. Second, converting the accommodative monetary policies of European banks into the real economy.

These are the conclusions of a new report from Standard and Poor’s in which the agency lowers Europe’s GDP growth forecasts for the rest of 2011 and all of 2012.  What does this slowdown mean for US companies that do significant business in Europe?

S&P sees demand for European goods continuing to grow in emerging markets, but that’s not much help for US industries’ European sales. But European capital spending is increasing slightly, which should continue to be good news for Caterpillar Corp. (NYSE: CAT), which generated 26% of its total revenues last quarter in Europe, at a year-over-year growth rate of 53%, the highest of all the company’s geographic regions. Other industrial manufacturers like Flowserve Corp. (NYSE: FLS), Paccar Inc. (NASDAQ: PCAR), Owens-Illinois Inc. (NYSE: OI), and Pall Corp. (NYSE: PLL), all of which do more than 40% of their business in Europe, could also benefit from increased capital spending.

Technology companies like Adobe Systems Inc. (NASDAQ: ADBE), which does about 33% of its business in Europe, and Lexmark International Inc. (NYSE: LXK), with 36% of its business in Europe, have not had a lot of success in Europe recently and increased capital spending may not help tech companies very much..

Consumer-oriented companies like automakers Ford Motor Co. (NYSE: F) and General Motors Co. (NYSE: GM) and tobacco company Philip Morris International (NYSE: PM) have experienced sales declines. The European “cash for clunkers” programs finally expired last quarter and that has put a damper on new car sales.

Some consumer products are doing fine, however. Coca-Cola Enterprises (NYSE: CCE) does about 60% of its business in Europe and it reports good sales growth. But a bottle of Coke is a lot cheaper than even a Ford Escort.

Fast-food leader McDonald’s Corp. (NYSE: MCD) got 22% of its revenue from its European region last quarter. Comparable store sales for the quarter were up 5.2% year-over-year. Yum! Brands Inc. (NYSE: YUM) is more focused on building its operations in China, but sales in its international division, which includes Europe, grew 6% in the second quarter, with same-store sales up 2%.

S&P expects a “rather more gloomy outlook emerging for consumer demand” in the UK than in the rest of Europe. Like their American cousins, citizens of the UK are more highly leveraged than Eurozone citizens. The UK is deleveraging, which, in turn, causes spending on consumer goods to fall. High unemployment and government austerity moves don’t really help the situation.

S&P now expects German GDP to grow at 2% in 2012, down from a forecast of 2.5% in July. Growth in France is now forecast at 1.7%, compared with 1.9% for 2012 just a month ago. The GDP growth forecast for Spain has been cut from 1.5% to 1%, and the UK forecast for 2012 from 2% to 1.8%.

Even if the S&P forecasts turn out to be on target, GDP growth in Europe will be about the same as forecast for the US. That’s not a particularly bright picture for the next 18 months. The only consolation is that it could be worse.

Paul Ausick

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