The spectre of disinflation continues to hang over the eurozone despite 'rosier' growth forecasts for the region, says Goldman Sachs Asset Management (GSAM).
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.
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