31 March 2008

EZA 837 Briefing Note: Euro Area

Euro area – prospects for de-coupling


The scale of the current economic downturn in the euro area seems to imply more and more parallels to the situation in 2001/2.
During this episode the ECB was slow in cutting interest rates because of accelerating inflation, thus deepening and protracting the economic downturn at that time.
The euro area currently faces similar conditions, but both underlying demand and easing in liquidity conditions seem powerful forces for euro area resilience.
Hence we expect euro area growth of sub 1.5% this year, but stabilising at this level in 2009, as monetary conditions plus fiscal policy is likely to provide gradual relief.
The weak link in such a stable scenario seems the high level of corporate leverage, demanding continuing support through liquidity or reflating the world economy.
Inflation, while elevated this year, seems to reflect late-cycle price pressures, which are to subside gradually from late 2008 onwards.


Asset conclusions: stocks are likely to be supported in the medium term through stable growth prospects, government bonds might look over-extended.

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