23 February 2007

EZA 779 Report: Economic Outlook

Euro area economic outlook: mid-cycle slowdown should be shallow

After five years of patchy growth, in 2006 the euro area and the German economy last year embarked on a full-blown growth cycle – in line with our expectations (EZA rpt. 756). This can be concluded from the 13Feb GDP release for both Germany and the euro area and the quarterly growth trajectory in 2006. The growth rate of 2.7% both in Germany and in the euro area almost matched the figure for the year 2000. But in contrast to 2000, which marked the end of the last economic cycle, the current cycle seems to have run less than half its course. Looking at 2007, we adjusted our growth and inflation trajectory slightly, as we now expect the impact of fiscal tightening to be spread rather than concentrated in 1Q. Growth in Germany will likely remain aligned to the rest of the euro area, since the gap in household spending growth will be offset by stronger export growth and out performance in machinery investment and business construction.

Asset conclusions: bonds seem fairly priced relative to the growth outlook, interest rate expectations rather low as are expectations of corporate profits.

© Graham Bishop