Bears gather around the Goldilocks eurozone
David Zahn, head of European Fixed Income, Franklin Templeton Fixed Income Group
In the eyes of many observers, the eurozone is enjoying a “Goldilocks” moment: Conditions are “just right” for growth. Just like Goldilocks, the eurozone is having to contend with bears; not the porridge-eating inhabitants of the woods, but rather commentators casting doubts about the European Central Bank’s commitment to its quantitative easing programme, or pointing to new data suggesting the European powerhouse of Germany is not as impressive as it once was. Despite the naysayers helping to fuel a recent selloff in the European bond market, we believe there are reasons to be optimistic that the eurozone can keep one step ahead of the bears. Here’s why.
The eurozone—the 19 European countries that share the euro as a common currency—is currently offering what we would regard as an ideal environment to generate growth, so we’d certainly be slightly concerned if the economy there was not growing.
Many aspects are working in favour of eurozone growth: Oil prices are significantly lower than they were a year ago, and that’s proving supportive of European economies; at the same time, the euro is significantly lower than it was a year ago, and that seems to be spurring exporters. Meanwhile, the European Central Bank’s (ECB) quantitative easing (QE) programme is underway, and the ECB seems determined to prove it’s serious about sticking with that.
Still, we feel that the region is not likely to enjoy the “add-on” effect on growth year after year, especially now that oil prices seem to be showing signs of stabilisation and the euro appears to be getting closer to the end of its selloff. We don’t think there’s any great slowdown coming in the eurozone, but we do recognise that growth in Europe has been particularly strong in recent months, and we would expect to see that rate of growth start to fade, probably at some point later this year.
One reason we think growth might slow is that Germany, the traditional engine of eurozone growth, is not growing as strongly as most observers would have hoped, especially compared with other economies in the region that have faced headwinds in the past and are now doing better.