24 October 2016
Easy monetary policies and low energy prices will help the eurozone economy. Photo: Bloomberg
Easy monetary policies and low energy prices will help the eurozone economy. Photo: Bloomberg

Why eurozone will stay on recovery path

From a macro perspective, investors appear to have over-reacted recently to fears surrounding the global economy, including the eurozone.

In early 2015, exports got a boost in the eurozone following a devaluation of the euro. But there was even faster growth in imports, affecting the overall impact on GDP growth in the region.

The real growth driver, in fact, was domestic consumption.

In 2016, we still believe that strong production capacity in the eurozone will lead to growth in consumption there. Unemployment situation is improving, though the rate is still at relatively high level.

The initial decline in unemployment rate is attributable to the public sector. But we are now seeing that the private sector has been adding more jobs, marking a strong signal of economic recovery.

Also, low oil prices will also benefit the region.

In terms of monetary policy, the European central bank is expected to expand its easing measures. Meanwhile, many European countries will continue adopt loose fiscal policies in 2016, after years of tightening.

Now, we have signs of an improvement in private sector investment. For example, we have noticed a pick-up in commercial investment in Spain and some neighboring economies.

Data shows the number of companies seeking loans in the first quarter has reached a post-2006 high. Most of the demand for credit is from the companies seeking bigger investments.

Many economies have launched reform measures to improve the business environment. Results have started to show, but more efforts are necessary.

The World Bank ranks the eurozone as No. 33 in the world in terms of the ease of doing business, while the UK is in the 6th position and the US is at No. 7.

Overall, we think the combination of fiscal and monetary efforts, plus increase in consumption brought by low oil prices, will help the eurozone economy stay on the recovery path.

This article appeared in the Hong Kong Economic Journal on Feb. 22.

Translation by Myssie You

[Chinese version中文版]

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Chief Asia Market Strategist at JP Morgan Funds

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