EC’s growth forecast ‘realistic’ after chop

Cuts to European growth expectations by major policymakers have been welcomed by investors, who claim they are now more realistic although still too optimistic in some instance.

The European Commission slashed the expected growth rates in Europe for 2015 to 1.1 per cent, compared with a prediction of 1.7 per cent just six months ago.

In its autumn forecast, it said it expected “weak economic growth for the rest of this year” in the eurozone and the wider European Union.

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It said growth in 2015 would improve slightly and would recover in 2016 thanks to the “strengthening of the financial sector” after the full conclusion of its stress tests and subsequent reforms.

Holger Fahrinkrug, chief economist at Meriten Investment Management, said he thought the figures were “now coming into line with what we have been thinking for some time”.

“I was more surprised about the surprise shown by the markets,” he said. “The figures are now within our margin of error.”

Mr Fahrinkrug added the “reform countries” such as Spain and Portugal, which undertook sharp austerity measures and domestic reforms, had now started to show recovery, potentially putting pressure on countries that have not enacted any economic changes.

“At least this will increase or strengthen the argument to introduce supply-side reforms in France and Germany,” he said.

“I think Italy and France should look at the example that Spain and Portugal have set. I think it will strengthen the argument in Brussels towards these countries introducing more reforms.”

He added an acceleration in the eurozone would be “hard to achieve” alongside a slowing Germany.

“The elephant in the room has moved, but just moved slowly,” he said.

Maxime Alimi, economist for the eurozone at Axa Investment Managers, said the growth numbers predicted by the European Commission were “still slightly higher than ours”.

He said: “They are not unreasonable, but I would say still on the optimistic side. There is a pretty sharp acceleration predicted for 2016, which to me looks quite aggressive.”

However, he thought the predictions for Germany were “weak” and he was predicting more robust growth.

Mr Alimi said the distinction between core and periphery had dissipated, given Germany and Spain were “doing okay”, but Italy and France were “very sluggish”.

On the question of whether the data would pressure countries that had not undergone domestic reforms to implement them, Mr Alimi pointed out that for a country such as France, it was “very difficult”, given it is not in a situation like Spain was, which had “no choice” but to oblige.

Gianluca Moretti, fixed income economist at UBS Global Asset Management, agreed the growth predictions were “what we were expecting”, but his figures were “slightly lower for 2015 but only marginally”.

He noted the language of the European Commission had changed and now emphasised domestic reforms as opposed to “relying on other countries’ growth” to rub off on the bloc.

“We predict the periphery will grow faster than Germany, France and Italy,” he said.