2nd September 2014
Schroders has downgraded its forecast for the eurozone on the back of weak growth and inflation, warning that those hoping to see quantitative easing (QE) this month could be disappointed
Yesterday’s Manufacturing Purchasing Manager Index (PMI) figures put growth in the region at a 13-month low in August.
Azad Zangana, European economist at Schroders, says that while the UK economy continues to power ahead, he does not have the same expectation of the eurozone.
He says: “Official estimates show the eurozone stagnated in Q2 following poor performance in core Europe.
“The notable exception was the strength of the UK, where the economy expanded faster than any of the other major European economies for the second quarter in a row
Zangana says that seasonal factors are partly responsible for the slowdown in eurozone GDP growth, but tensions as a result of the Ukraine crisis may also have impacted confidence.
He adds: “Inflation has also been disappointingly low, which, in combination with weaker-than-expected growth, has prompted a lowering of medium-term inflation expectations.”
Many have interpreted recent comments by European Central Bank (ECB) president Mario Draghi as a precursor to QE, but Zangana is unconvinced.
He says: “While his speech was clearly dovish, we struggle to see the ECB announcing more aggressive measures like sovereign debt QE when extra liquidity to banks will be released next month, and possible asset-backed securities purchases are still being worked on.
“Markets may be in for disappointment at the September ECB meeting.”
Schroders has lowered its forecast for eurozone GDP growth in 2014 to 0.8 per cent and to 1.2 per cent in 2015.
The main downgrade has been to German growth.
It has also reduced its eurozone inflation projections to 0.7 per cent in 2014 and 1.1 per cent in 2015.
Schroders has revised its forecast for UK growth up to 3 per cent in 2014, but it expects the economy to slow to 2.5 per cent next year as the general election could prompt companies to delay business investment.
It forecasts the first rate rise in February 2015, followed by increases of 25 basis points each quarter.