3 minEurozone lags behind
Read the analysis by Damien Petit, Head of Private Banking Investment at Banque de Luxembourg, which appeared in Luxembourg’s economic and financial magazine, Paperjam.
2020 was marked by an unprecedented contraction in global wealth. The eurozone has been particularly hard hit, with GDP falling by an historic 7% compared to 2019. In contrast with the United States, economic activity contracted further in the last three months of the year. However, this decline was much more moderate than expected, despite ongoing severe movement restrictions.
Although the recovery in the eurozone has been a little delayed, it should materialise in the coming months as the health situation improves.
Activity continuing to contract at the beginning of the year
The fall in the composite PMI index in January to 47.8 points suggests that the region’s GDP will continue to contract in the early part of the year, With persistent concerns over the health situation and the cumulative delay in the administration of vaccines – especially compared to countries such as the United States and Great Britain – the imperative of maintaining strict measures limiting mobility is delaying the green shoots of an economic rebound.
Significant reserve of savings to boost the economy
Although the recovery in the eurozone has been a little delayed, it should materialise in the coming months as the health situation improves. The significant reserve of savings accumulated during the pandemic is likely to be at least partially utilised and will boost economic activity. This should be of particular benefit to services such as tourism, the hotel and catering industry, and leisure activities that were inaccessible due to the authorities’ shutdown of economies to prevent healthcare systems from being overwhelmed.
Long-term interest rates rising slightly
In developed countries, long-term interest rates seem to be anticipating this rebound in activity. They have been on an upward trajectory in recent months. The German 10-year yield has risen by around 15 basis points since the beginning of the year, which is a moderate rise in the wake of the rather more marked rebound in US yields. In the United States, the prospects of additional fiscal measures to support the new Biden administration have propelled 10-year Treasury yields well above the one per cent mark. This is due to rising expectations for inflation: the 10-year forecast now stands above the long-term average, at 2.2%.
Inflation returning?
Are we on the verge of a resurgence of inflation? Upward pressure on the prices of goods and services as reflected by the consumer price indices is currently very contained, both in the US and the eurozone. However, the disinflationary environment of recent decades could give way to a more inflationary environment in the medium term. The sharp rise in debt levels, the financing of public deficits through money creation, the monetary authorities’ acceptance of more sustained inflation and questioning the benefits of globalisation are all factors that are likely to support structurally higher price growth in the long term.
In this context, the rationale for significant exposure to fixed-income securities has declined even further. In our portfolios, we prefer to prioritise real assets. High-quality companies with pricing power should enable investors to adequately hedge against the risk of higher inflation over the next few years.