Growth in the region has been supported by very easy monetary policy and a substantial currency devaluation, while unlike the UK, the fiscal squeeze is now mostly in the past.
A range of business surveys and monetary data now suggest that Eurozone GDP growth could surprise on the upside next year. The main economic sentiment indicator of the monthly European Commission survey has risen to a four year high, while broad money growth is running at a six year high, with a sharp rise in lending to corporates and households.
Unemployment remains high, however the unemployment rate has now fallen to a four year low. With consensus growth forecasts suggesting a broadly similar growth outlook in 2016 to 2015, investors remain overly cautious.
While headline inflation remains very low, at just 0.1%, we have probably seen the lows. The impact of the steep fall in oil prices in late 2014 will soon drop out of the annual comparison and the weaker Euro will push up imported inflation, while falling unemployment should push up domestic inflationary pressures.
Of course, the outlook is not without risks. A sharp slowdown in China is on everyone’s list of possible outcomes, while the drawbacks of running a single currency area in absence of fiscal and political union have been clear for some time. Following the recent terrorist events, the drawbacks of a borderless Schengen zone, in absence of a security and intelligence union, are also clear.
Mindful of these risks we are optimistic on the economic outlook and continue to favour Eurozone equities in our multi strategy funds.
