January 20th Weekly Market Update
European Central Bank (ECB) is likely to announce a quantitative easing (QE) program involving European sovereign bond purchases at its upcoming policy meeting on January 22, 2015.
WHAT WE ARE WATCHING
Economic growth gap between the U.S. and Europe is widening. The U.S. economy has been growing faster than Europe in recent years based on real gross domestic product (GDP). Based on the Bloomberg-tracked consensus of economists’ forecasts for the fourth quarter, Eurozone GDP grew 0.9% during 2014, compared with 2.3% for the U.S. We expect that gap may widen in 2015, as our forecast for U.S. GDP growth is at least 3%.* Even with QE, we do not expect growth in Europe to accelerate in the near term, and as a result we expect this growth gap may widen — although the gap in the third quarter of 2014 of more than 4% (5.0% in the U.S. versus 0.6% in the Eurozone) is not expected to be sustained.
Deflation risk remains high. Sluggish growth and structural challenges (more on that to come) have led to deflation in Europe, which could result in delayed purchases and investment, further slowing the economy. December 2014 annual inflation in the Eurozone was just -0.2%, or 0.8% excluding food and energy (Eurostat data), not anywhere close to the ECB’s 2% target. Meanwhile, inflation expectations have continued to fall. QE could help a bit in this regard, but we do not expect it to be enough to drive a sustained gain in prices, especially when considering the lack of economic growth.
For the full article: EUROPEAN HEAD FAKE?