UniCredit Research remains cautious on eurozone GDP growth in 2010 and forecasts a year of only moderate recovery. Inflation should remain under control, and the ECB probably won't raise the refi rate until 2011. Bond yields are set to rise, and USD could suffer during the first half of the year.
According to the annual economic analysis published by UniCredit Research, the recession is over, but 2010 will be a year of only moderate economic recovery for the eurozone. Growth to date was mainly driven by exports and some temporary support factors (such as the car scrapping schemes) that will wane as 2010 progresses, while signs of endogenous growth are still scarce and investment fundamentals remain weak.
After a relatively solid 2H 2009, the recovery will probably lose some steam in early 2010, with a more sustainable upswing set to begin only next year. After a nearly 4% collapse in 2009, eurozone GDP should be up by 0.9% in 2010 and by 1.3% in 2011. Inflation pressures are going to remain tame for the foreseeable future.
Core prices are set to slow substantially further in response to the massive output gap and falling unit labor costs, while food inflation is unlikely to revive soon. UniCredit Research expects CPI to rise only 1.3% in 2010. In 2011, we see inflation accelerating to 1.8%, but this forecast strictly depends on the assumption that oil prices will breach again the USD 100 p/b mark.
Central Bank policy and interest rates
In this context, and given that weakness in lending dynamics is expected to continue for some time, the ECB can afford to be gradual in its exit strategy: a progressive withdrawal of liquidity with the refinancing rate on hold is the most likely outcome this year. The tightening cycle will probably begin in early 2011.
In the Fixed Income universe, the 2010 hot topics will be the strength of the recovery, Central Bank exit strategies and asset price bubbles, government debt sustainability and sovereign rating. We forecast a rise in government bond yields, due to a combination of exit strategy, moderate improvement in the economic cycle, increase in risk appetite and supply pressure. The main theme both in the EU and the US should be bear flattening and we expect the upward shift in yields to be more significant around mid-year.
On the Foreign Exchange front, in the first half of the year the USD is expected to give up part of its recent gains, as the slowing US growth momentum will reinforce the idea that the Fed will not hike rates before 3Q 2010. EUR-USD will recover back to above 1.50, also supported by diminishing sovereign rating concerns across the euro area. Elsewhere, we remain positive on sterling but negative on both the JPY and CHF. Resurfacing risk appetite and higher commodity prices will also support the Australian and the New Zealand dollar, as well as the Swedish and the Norwegian currencies.
Milan, 15 January 2010
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