by Steven Bell, Managing Director, Portfolio Manager & Chief Economist,
Growth in Europe has been disappointing. This time last year, the economy looked like it was booming, but 2018 has seen growth decelerate sharply as a harsh winter took its toll on activity. GDP growth was a meagre 0.3 per cent in the second quarter, a rate that even undershot the beleaguered, Brexit-blighted UK. But it’s far from being all doom and gloom. The eurozone is still growing at an above-trend rate, unemployment is falling and deflation is no longer a
This means that the European Central Bank (ECB) can finally start to wean the region off monetary support by ending its asset purchase programme (quantitative easing) at the end of this year and slowly start to raise interest rates from their negative level, probably sometime in the second half of next year.
The political and economic weakness of the
a cautious, high-saving private sector. And if Europe wants to keep the EU project on the road, it knows it needs to show Italy some love. Indeed, we expect talk without action by the EU Commission to the recent budget proposals by the Italian government.
The Italian coalition government has already realised that it needs to keep its ambitious fiscal plans contained. There may be new elections and a new government in 2019 but we believe that, on balance, investors are being sufficiently compensated for the risks in Italy.
The big issue, in our view, is not the threat from the EU authorities but rather the risk that Italian government debt is downgraded to sub-investment grade. Italy is currently rated two notches above sub-investment grade across the three main
Should two of these three agencies downgrade to sub-investment grade, many benchmarked investors (including the widely followed Bloomberg Barclays Global Aggregate) would be forced to liquidate holdings. We can be sure that markets will be volatile but overall, again, we think investors are reasonably well compensated for risk in Italian assets.