Eurozone Outlook – April 2014
National Performances Differ
Eurozone optimists will have found predicting the fortunes of the eighteen-nation bloc in the past month a little bit like choosing heads in the toss of a double-tailed coin. As the area comprises a number of individual member states which – as we pointed out last month – are enjoying or suffering varying degrees of fortune, one positive piece of economic data can very quickly offset by negative news.
The unemployment level dipped to 11.9% in February – still high, but lower than the 12% expected by analysts, and a hint at economic recovery. However, this overall figure does not account for the highs and lows experienced by different euro members, with unemployment riding low at 5.1% in Germany but critically high in Greece (27.5%) and Spain (25.6%). Greece, currently Chair of the EU Presidency, is arguably still the weakest Eurozone nation. Suffering from high debt and unemployment, it will receive the majority of its next £6.8 billion instalment of bailout funds in April. It is forecast to leave its six-year stint in recession this year, but a high unemployment rate makes recovery a steep slope for the southern state to climb.
Fears of Deflation Persist
Eurozone inflation fell to 0.5% in March, according to an estimate by Eurostat, the European Commission body for statistical information. Off by 0.1% from predictions of 0.6% and significantly lower than the European Central Bank (ECB)’s target of 2%, threats of deflation continue to hound the single-currency area. However, although deflation is expected to have negative effects on the economy, it appears that investors may already have priced this into their exponentially low hopes for the euro, meaning that any deviations that inch towards deflation many not have too large an impact on the euro when regarded in increments. The question for the Eurozone is how the ECB will react if threats of deflation continue to grow more pronounced. Investors are on the lookout, keen to see if the ECB will have to resort to negative interest rates in order to boost an economy that is failing on the whole.
Eurozone – Forecast
The ECB is clearly worried and concerned about the possibility of deflation and a lack of growth in certain parts of the Eurozone. It seems they are also keen to see a weaker euro. The trouble is that rhetoric alone is unlikely to be the catalyst for a weaker euro. The ECB will have to act and we suspect that, rather than reducing interest rates further, they will introduce their own form of quantitative easing. The timing for this is unknown, but it will have to be reasonably soon to give the southern states some sort of boost in their economic recovery.
The UK will also be looking to increase interest rates sooner that the Eurozone, which will be a boost for sterling. Timing is unlikely to be any time soon given the eighteen indicators that the BoE is now using to measure progress, but it tilts the balance of strengthening in sterling’s favour. This why we expect to see steady appreciation for sterling over the coming twelve months.
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