Euro area in 2016: Four headings and a numeral – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 8, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Goldman Sachs, lists down the Euro area outlook for 2016, under four headings.

    Key Quotes

    Migration flows – The inflow of refugees from the Middle East has significant implications for the Euro area economic outlook in both the short and longer term. But it also challenges the potentially fragile political equilibrium both within and between European countries that underpins the process of European integration and the integrity of the Euro area. While we are optimistic that the integration of the refugees who have arrived thus far can be managed successfully, if the inflow of refugees were to resume the pace seen last summer once the weather improves in the spring, the political fall-out would likely be substantial, challenging the current stability of the Euro area.

    Domestic demand grows – The fiscal implications of the refugee inflow imply stronger Euro area domestic demand. Taken together with ongoing macroeconomic policy stimulus and the support for domestic activity coming from past financial, exchange rate and commodity price developments that are already in the pipeline, domestic demand should prove both more robust and more resilient than in the recent past.

    China slows – The expected resilience of domestic demand is fortunate, given that the slowdown in emerging markets in general (and in China, in particular) is set to weigh on Euro area external demand and economic growth in 2016. A ‘hard landing’ in China is an important downside economic risk to our outlook.

    Political woes – Domestically, risks to the Euro area forecast stem largely from the political domain. The potential for political disruption to disturb Euro financial markets and the European recovery is varied and substantial. Risks include: the refugee crisis undermining Chancellor Merkel’s authority; a derailment of the Greek adjustment programme; ‘Brexit’, and Spanish political uncertainties around Catalan independence.

    … and a numeral, 1½%

    We forecast economic growth in the Euro area to continue at slightly above 1½%pa, while the outlook for inflation at the (policy-relevant) two-year forward horizon converges to an annual rate of around 1½%. While we do anticipate some further policy easing, this is likely to be gradual, reflecting a willingness to acquiesce in a world of 1½% growth and inflation. More dramatic and substantial policy easing is only likely to come as a response to a significant deterioration in the outlook relative to our expectations.”
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