UBS trims Eurozone growth forecasts but says recovery still on track
UBS made some modest downgrades to its Eurozone growth forecasts on Monday, but insisted the recovery is still on track.
The Swiss bank cut its gross domestic product forecast to 1.4% from 1.6% for 2015, and to 1.9% from 2% for 2016, after first and second-quarter growth came in somewhat weaker than it expected. This compares with consensus of 1.5% and 1.8%, respectively.
Still, UBS said the overall message has not changed and it remains constructive on the Eurozone recovery thanks to unprecedented ECB stimulus and the soft euro, low inflation and oil prices supporting real incomes and consumption and the moderation in fiscal austerity.
In addition, it pointed to the gradual improvement in credit conditions.
UBS said key risks stem from China and disruptive Fed tightening, but also from potential new complications in Greece and Ukraine, as well as domestic politics.
“We would highlight oil prices remaining lower for longer as a source of upside risk,” it said.
The bank said Germany, where net exports and investment have been weaker than expected, is the major culprit behind its Eurozone downgrade.
It cut its growth projection on Germany to 1.5% from 2.1% in 2015 and to 2.1% from 2.4% for 2016.
Outside of the Eurozone, the bank now expects to see 2.7% growth in the UK in 2015, versus a previous forecast of 2.5%.
Its base-case scenario is for quantitative easing in its current form to continue until September 2016, followed by tapering. After the recent energy price moves, UBS expects year-end Eurozone inflation rates of just 1% for 2015 and 1.5% for 2016, versus 1.3% and 1.7% previously.
“Consequently, we think the hurdle for an early exit from QE will be very high.”
As far as European equities are concerned, it said China is the biggest risk, but so far the impact is contained to the commodity complex and specific companies with high direct exposure.