The social and economic model deployed by the Eurozone economies in recent years is broken and will have to change, according to Konstantin Veit, portfolio manager at Pimco.
He told FT Adviser the euro area's reliance on cheap imports from the likes of Russia and China were a particular issue it was now having to face.
"The economic model was to rely on Russia for cheap energy, China to buy the exported goods, and America to provide defence and security. But recent world events show this is no longer a sustainable model," he said.
"This is potentially a very big problem for Germany, as it is the economy most impacted by the change.
"Although for many years Germany has been the strongest performing in the Eurozone, there was a period prior to that where Germany was called the ‘sick man of Europe’, and it needs to rebalance."
He added: "I think a recession is likely there in the short-term. Germany is playing catch up in terms of public investment, it has lagged behind in that regard for twenty years. And perhaps there is more urgency there now in terms of defence spending, but also climate transition spending."
Guy Miller, head of macroeconomics at Zurich, said the Eurozone economy was “dull” in the sense that there is very little growth, “but the thing that’s unusual is that southern European countries such as Spain are actually growing quite well as consumers around Europe have pivoted their spending towards experiences such as holidays, and that helps economies such as Spain which are very services based.”
Miller also expects Germany to enter a technical recession this year, but said it was likely to be a modest downturn, in part because “the economy hasn’t been growing much anyway so a downturn would be from a low base.”
Rates vs growth
A feature of the Eurozone has been that when the German economy was growing steadily, and other, so called “periphery”, economies on the edge of Europe, such as Italy, Spain and Portugal, had sluggish growth, it was in Germany’s economic interest to maintain interest rates at relatively higher levels than worked for the rest of the Eurozone, as Germany had no need to stimulate growth.
But now with the German economy the laggard, it may be that the economy needs the boost from lower rates, but the southern European economies do not.
Veit said the European Central Bank, the area's rate setting body, was tasked with ensuring price stability, i.e. the management of inflation, rather than helping to generate economic growth.
On the outlook for inflation, Christophe Boucher, chief investment officer within the Solutions business at ABN AMRO, said the latest figures showed a decline in Eurozone inflation, largely driven by the impact of the previous years' higher energy prices falling out of the data, but that core inflation, which strips out those volatile effects, fell only modestly, while services inflation actually rose.
