Europe’s Economy Is Stable, But Is It Healthy?
28 MAY 2014
Developments in Europe continue to make global headlines. Taking a step back, Deputy Chief Investment Officer and head of European portfolio management Andrew Balls outlines PIMCO’s long-term outlook for the world’s largest economic zone, focusing on how low growth and inflation trends and policy responses may shape Europe over the coming three to five years.
Q
What is PIMCO’s secular outlook for Europe?
A
Balls: The central idea in our global secular outlook is for a New Neutral policy rate for central banks, with the U.S. Federal Reserve’s (Fed) rate likely to be close to zero percent in real terms, adjusted for inflation, over the next three to five years. Likewise, owing to very high leverage, demographics, fiscal tightening, more constrained credit conditions and – in the case of the eurozone – the aftermath of the sovereign debt crisis, policy rates are likely going to remain very low at the European Central Bank (ECB) and the Bank of England (BoE) over the secular horizon. This has broad implications for European markets.
We expect ongoing renormalisation of eurozone markets. Over the coming three to five years, we expect the eurozone to grow at a 1%–1.5% real rate, close to its trend growth rate of about 1.25%, but with some chance of a period of above-trend growth given the improvement in financial conditions. This equates to roughly 3% nominal growth that, while not very strong, should be enough to maintain overall stability and probably permit a very gradual reduction in government debt levels.
There are tail risks, for sure, around this secular baseline, but we see the eurozone as offering a wide range of opportunities for European and global investors alike, both from a top-down, macro-driven approach and from bottom-up security selection across the capital structure