Panmure’s Simon French encouraged by the EZ’s path away from deflation!

A wealth of Eurozone data this AM so a brief summary: Inflation is ticking up to precisely 0% (-0.1% previously) – here the weaker Euro is doing its best by raising the price of imports. Core inflation is at 0.6% (1% UK) and the 5yr foward inflation-linked swap is at 1.7% (below the 2% target the ECB is shooting for). Deflation therefore remains a substantial risk in the Eurozone given unemployment (unch @11.3% – compared with 5.6% in US/UK) signalling a significant (4%-5%) output gap. Additonally the deteriorating demographics strongly point to structural stagnation over a longer time horizon particularly in Germany and Italy. I do not buy the equity-led/”wealth effect”/QE recovery story until unemployment starts to show signs of falling and there are widespread reforms to labour laws and welfare reform. In terms of country-specific data: Spain and Germany outperforming with Italy and France as lagards. The problem facing EZ is that they need to scrap the Stability and Growth pact and spend a bucket load on infrastructure to stimulate private investment – there is no threat of crowding out at the moment. Overall an improving picture thanks to QE & oil but it is set to be short-lived as things stand.


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