Eurozone: Springing into recovery


By Nathan Lee, TLE Correspondent 

Europe is getting back on track, according to Schroders’ Senior European Economist Azad Zangana, who believes the unclogging of the banking sector along with falling oil prices and quantitative easing is prompting better-than-expected results.

Despite Greece being nowhere nearer to agreeing the terms of its next bailout, raising the likelihood of a forced exit from the eurozone, peripheral markets have seen little contagion and there is even room for optimism in Europe.

Firstly, Zangana argues, the weaker euro is likely to increase demand for eurozone exports (as these become cheaper in local currency terms in foreign countries) and reduce demand for imports (as imports become more expensive in euro terms compared to domestically-produced goods). The improvement in net trade will not be noticeable at first, but should begin to contribute to growth over the coming years.

Secondly, as firms become more confident about the sustainability of the recovery, they will begin to rebuild inventories which could contribute 0.25 per cent -0.5 per cent to GDP over the coming four to six quarters.

After a miserable 2014, the eurozone is also finding its feet with macroeconomic data surprising consistently to the upside. The turning point for Europe was the end of the asset quality review (AQR) last year, Zangana believes. With banks no longer focusing on building up capital reserves in anticipation of the review, the sector has resumed normal lending activity and it is expected that this to continue to build this year. Further support for the economy has been found in the lower oil price which has helped lift disposable income and boosted spending elsewhere in the economy.

Although the likelihood of a Greek exit from the monetary union has risen, the central view remains that Greece will remain in the eurozone, either through a change in government or an eventual capitulation to the demands of the Troika (which comprises the European Union, European Central Bank and International Monetary Fund). Zangana says he expects additional volatility in European equity and bond markets in the next month or two, however, he ultimately expects a deal to be reached, and failing that, contagion to other peripheral markets to be limited.



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