A just published report examined the outlook for the euro area after a bout of soggy economic data and recent mild disappointment in terms of asset market performance.
The report examined the “hard” and “soft” (mostly sentiment gauges) economic data which have diverged significantly in the past year, and came to the non-consensus view that the downshift in growth is merely a temporary slowdown, rather than the onset of a recession, much like the U.S. experienced in the latter part of 2022. Euro area manufacturing sentiment is depressed, albeit mostly due to pandemic-related distortions. The service sector, however, shows signs of a choppy recovery. Importantly, household demand should firm with the energy crisis over, and confidence recovering from last year’s lows.
The improving service sector, more upbeat consumer and stronger tourist activity should ensure that the expansion persists and a recession is avoided in the next 6-12 months. The implication is that core inflation will fall less than expected and keep pressure on the ECB to maintain a relatively hawkish bias.
We remain overweight euro area equities within a global equity portfolio to benefit from improving relative corporate earnings, while staying underweight euro area bonds within a hedged global fixed-income portfolio. Also, the euro still has an appealing risk/reward profile and we remain overweight versus the U.S. dollar.