Eurozone Economy Likely to Grind Lower

Terry Flanagan

The Eurozone economic environment is not currently capable of sustaining rapid rates of growth according to Daniel Murray, chief economist at EFG Bank, the Swiss financial services firm.

Murray told Markets Media: “Europe has turned around in the last year but the economic environment is not one currently capable of sustaining rapid rates of growth.We are not expecting a rerun of the sovereign debt crisis but an analogy with Japan is appropriate in some respects.The economy is more likely to grind lower rather than experience a sudden sharp deterioration.”

He will be moderating a panel on the Global Investor Outlook at Markets Media’s Global Markets Summit London on October 16.

At the beginning of September The European Central Bank cut interest rates, pledged to pump more money into the banking system to encourage lending and purchase asset-backed securities.

“The ECB measures will have limited impact,” added Murray. “The first round of TLTROs [targetted long-term refinancing operations] will just replace the LTROs which are due to expire in January and February next year. At present it is difficult to imagine the asset purchase program being of sufficient size to have any meaningful impact.”

Mario Draghi, the ECB president, is under pressure to launch full quantitative easing, similar to the program from the US Federal Reserve, if these measures fail to boost the Eurozone economy. However Germany is opposed to the ECB buying government bonds as the founding treaty of the Eurozone forbids the financing of individual governments and because the German central bank believes it would discourage countries from making necessary structural reforms.

This month the International Monetary Fund warned that the eurozone could fall back into recession without further stimulus.

In contrast, Murray is more optimistic about growth in the US.

“The US economy looks reassuringly dull and should be absolutely fine. We do not expect to see either a sharp lift off or a sudden downturn,” he added.

Murray also favours equities despite few markets looking cheap.

“Equities are the only game in town. The question is how do you disperse risk and what degree of ballast you put on the other side of the trade,” he added.

One country that looks cheap is China and Murray said there are other positive catalysts in place such as planned link between the Hong Kong and Shanghai stock exchanges. Shanghai-Hong Kong Stock Connect, which could launch this month, will allow investors in one market to buy and sell eligible shares listed on the other.

Russia could also present an opportunity. “Russia is a rare example of a market that is outright cheap but that is not a trade for the faint-hearted,” Murray added.

Murray said two risks to markets include a sudden acceleration in global growth which could lead to a sharp rise in rate expectations and create uncertainty over the future policy path or a more dramatic than currently expected slowdown in Europe, for example due to weak export markets exacerbated by ongoing contraction in China. “I believe the former is more likely than the latter,” he said.

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