Speaking to InvestorDaily, GSAM Australia fixed income client portfolio manager, Sean Reynolds, said his firm’s forecast for European growth has “ticked a little higher”.
“I don’t think Europe’s going to shoot the lights out this year, but forward-looking indicators are pointing in the right direction, which is higher,” Mr Reynolds said.
That said, external factors (such as lower energy prices and a weaker euro) are the major factors behind the “more rosy” short-term growth outlook, he said.
“[But] it doesn’t change the fact that you’ve got a lot of stimulus in place by the ECB looking to turn around inflation, and looking to fight this disinflationary trend that [GSAM has] talked about a lot,” Mr Reynolds said.
Spot inflation at the headline level has fallen into negative territory in recent months, he said.
“[The ECB] needs growth, but they also need to change the market’s thinking about inflation,” Mr Reynolds said.
To that end, deposit rates were cut to a negative figure in June 2014 and “the final bullet” was the ECB’s quantitative easing program, he said.
But a closer look at the region’s economic indicators suggest the central bank has a way to go before Europeans’ animal spirits are fully revived.
“If you look at market-based measures of forward-looking inflation – that is, inflationary expectations – you haven’t really seen them turn.
“You’ve seen them stop falling, which is maybe a small win in itself.
“But the market is not expecting inflation to get anywhere close to the ECB’s target for a good five-plus years.
“That’s the key metric to watch – yes, growth is better and that’s good news, but there’s a concern around disinflationary forces in the Eurozone,” Mr Reynolds said.
