Italy could be a growth surprise for 2013, Goldman Sachs AM predicts

Italy could become an upside growth surprise in 2013, especially given the low starting base and the negative sentiment surrounding the country, according to Goldman Sachs Asset Management’s outlook for 2013 and 2014.

Jim O’Neill (pictured), chairman at the firm, said that as long as the ECB commitment remains credible, the main source of risks in Europe for next year will revolve around reform implementation.

In terms of growth, while recession continues, the firm’s activity indicator for Italy suggests the country has past the bottom of the cycle.

“One risk to this view is the pace of structural reform implementation. Italy is the only country in the European periphery where there has been no progress on lowering the relative unitlabour costs. If planned structural reforms, particularly the labour market package, do get pushed through, this could temporarily cap Italian growth,” O’Neill said.

Italy’s outlook remains conditioned by the political risk associated to the elections coming up in March.

Yesterday, primary elections among Italy’s Democratic Party, didn’t manage to appoint a new leader of the left-wing party.

The chairman of the Democratic Party Pier Luigi Bersani came in first with 44.3% of the votes, but failed to secure an absolute majority. Matteo Renzi came in second at 36.3% of the votes. The second round will take place on December 2.

According to the latest polls, the Democratic Party enjoys, at around 27%, the strongest support among the major parties, followed by the Five Star Movement which is seen at around 21%.

Elsewhere, the continued risk themes around the Euro area and the US that have dominated thinking and discussions this year are likely to remain on Goldman Saschs’ radars.

“The probability of an extreme outcome in the Euro area has been reduced, mainly by the ECB policy action, as well as some progress on structural reforms in the periphery,” O’Neill said.

In terms of asset market implications, the moderate global cyclical rebound that the firm is forecasting should be mildly supportive for risk assets in 2013, particularly in those areas where valuations remain suppressed.

“Risk assets should be further helped by the continuing monetary accommodation by major central banks. We believe the Chinese equity market could finally rally, and equities in Russia, Brazil and Italy, could also perform well, particularly if growth surprises on the upside,” Goldman Sachs said.

In fixed income, developed market yields should generally remain low, particularly at the front end. In currencies, we think the USD will remain rangebound against most currencies, except the USD/JPY, where we expect a meaningful rally.

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