The economic outlook for Europe appears to be brightening, but how sustainable is the recovery? Goldman Sachs’ Allison Nathan speaks with Jari Stehn, chief European economist for Goldman Sachs Research, and Richard Privorotsky, manager of European Cash Equities trading in the Global Markets Group, on the prospects for the region’s long-term recovery and how the markets—and investors—are positioned.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
It's his exchanges, Goldman Sachs I am also need, then, a senior strategist in Goldman Sachs Research in this episode will be at the accelerating recovery in Europe. To do that, I'm doing by your disdain chief european economies for Goldman Sachs Research and which promotes key the managing european cash equities trading in our global markets division will. twenty yards, discuss the economy and where fiscal and monetary policy stand for the region and are likely headed Yorick welcomed the programme iris, you are the economic outlook for Europe has brightened. In recent months we see a significant step up in the vaccine rule out that has facilitated that. But this isn't it It is time that growth has started to look better in Europe, but then ended up disappointing. Why is this time different? Well, we ve,
instead from because we're getting very encouraging information across a range of metrics in Europe. So, first, I would highlight that we have seeing pretty shop improvements now on the political side colleague, cases The delegations are now down pretty sharply video the Euro area vaccinations up. We think on track to reach fifty percent of the population later in June, and I think even though concerns around the new variant disaster, particularly the other delta, very happy and Uk Wilderness you think that evidence suggests that it's a manageable risk as long as the vaccine, more large continues its second. We we have already seen significant reopening steps. Hands off to continue in the summer and that's it goes highly relevant for services activity, which is very depressed, but
these restrictions lived. We should see you in unlocking off pent up demand as we go into the summer months, and third, the incoming activity data, I think, is consistent with a very strong pick up in activity, particularly services it may and June now. So far we only have preliminary services of high frequency data for June, but it does look like economy is generating and forward looking indicators, whether you look at business expectations, you look the new order suggested ass to run. Told me you take that together we see strong momentum into the summer. We are significant day about consensus, for growth, also key to influence you three: and we also think that there is room for that's wrong. There's fiscal support coming from recovery fund and our global growth is constructive and that, of course, import
for Europe, which is a very open economy, and so on? A mine for us is five point: four percent growth in twenty twenty one for the Euro area and eight point. One percent of the UK and both of them was pretty sharply about consensus, are you seeing differentiation across sectors in the economies? Are there some sectors that are really the varying from the acceleration you talked about and are there some that are still lagging debts. So your manufacturing activity has already been quite firm, saw industry production levels, for example, already normalized earlier in the year, and I think that partly because growth, momentum and parts of the world for China and the U S had been firm, and so that is the global trade and course manufacturing was not affected. The common restrictions during the third way says quite natural for manufacturing activity to have shown more resilience but service activity is still very depressed, which of course, is true.
What particularly in the contacts intensive parts where those structures are specifically targeted at those sectors and those are responsible really for the large remaining shortfall in GDP. Across Europe as these restrictions are lifted. We think it serves activity, should celebrate sharply and What we are seeing in the early data so far so data, because the services data is reduced will lag, but I think that I spoke very encouraging mentioned the increased fiscal supports in the EU to help prepare and recover from the pandemic how'd you see that playing out and you do sing what sort of a new era where we generally will see more support, a fiscal policy, or is this really just a one time shift in policy just to address the crisis, and Europe could move back if this golly tighter situation going forward, I didn't we. I've seen pretty well
the chief in fiscal policy across Europe and I think is helpful here in Europe to distinguish between national policies and an EU wide policies. So on the national basis. This is really where the covered, response initially took place, and I think european governments really fast we on bridging measures, rather than outright stimulus measures initially and discipline includes a short term work schemes and also the carpet. It seems that expensive but also very effective, shielding workers and in shielding funds, and so, for example, we saw one limit increase in unemployment in Europe than in the U S, but, of course, it came with a laugh increase in deficit across Europe on the national side. We think that deficits, wills to shrink ass, regarded it is true as calling recovers, but we think the term
towards consolidation is going to be a much more gradual one than in the past, and I do think that one of the key lessons that was learned after the crisis that Europe turned what's conciliation to quickly now, Second aspect of the fiscal responds in some ways the much more innovative one was, of course, the EU wide fiscal response with the creation of the recovery fund, which has I've been ratified and has now issue in debt and will respect those funds across countries, and this hugely important for southern Europe, because the allocation is there another large so easily. For example. Spain will get around twelve percent of GDP from grants and over the next few years, and the money will be
spend on things that tend to have high multiplies. Basically, public investment projects and their pad was a list and structural reforms, and so we do think the overall fiscal stance, if he's some together, the national level and you bite level, will remain expansionary across your areas. We estimate here it around one and a half percentage points to growth next year will be passed that so that is modest compared to what we ve seen in the? U S, I think that's clear, but opening its a huge improvement relative. What we saw after crisis, and I would also note that the fiscal soup it is very persistent recovery fund money will stretch all the way to twenty twenty six and that because when gets its name forward supposed to really support the recovery over multiple, yes of course,
to your policy has also play a key role in the recovery and the European Central Bank just met. They maintained the piece of thereupon purchases, even though we ve seen improving growth as if discussed and inflation. What was the key? Take away from that meeting ended anything surprise you about it, I would highlight three things. As you say, the governing council decided to changes steady hand. As president look, I called it with regard to Bonn purchases today maintained this pledge to buy at a significantly higher pace with its programme and motivated that by the recent increase in interest rates. Have you seen since the March meeting to say, there is the risk that this will feed through into borrowing costs that households and firms a face, but at the same time. Guide towards a slide production in the pace on the back. of Seasonal issue during the summer, so they typically by less doing all this, because they say
issuance- and that was our expectation. The son out outside Second take away and the most surprising one is much more optimistic, easy turned on the girls outlook Missy so that in the grove projections, those kids, much more than expected and also in the risk assessment, because the governing council now she's dead. that balanced, which has not been the case since December two thousand eighteen. So as we just disguised- and we very much agree with this- and our own rules numbers actually still higher than their numbers, Nonetheless, I think this is a big up great. For me. She be amended take way, and I think it's always the most forward. Looking take away was that they remained the cautious on inflation, despite that upgrade to growth, so you saw a small upgrade to. the core inflation profile, but they kept the end
point four headline: inflation and change to that's many ways. Their key number is a twenty two. free headline invasion under the cap that at one point, four percent, which is still well below that aim off to descend following and out of bad luck. He said that any exit discussion at this point, is premature, and an unnecessary, and so Your bottom line for us is that we think I will keep policy hiding culminated well into the recovery because it will take time for inflation, involve end we don't have a height from the OECD until twenty. Device the easy being not changing their inflation forecasts was perhaps strictly surprising just because Inflation has jumped recently in the Euro area is reached the central. Target for the first time and more than two years. So what gives them confidence that this is a temporary verses, a longer term move? And you agree with that
I think it's really the structure of the inflation increase and, of course, that similar was in other countries such as the: U S and bad one factor: commodity prices, that's Katy, pushing up headline inflation, another one is based effects, so here we had some prizes last year, and so the comparison one year later points do a big increase and then there was a number of technical factors, some of them specific to Europe, such as tax changes that we think, likely to push up inflation more in the next few months. Anything invasion were peak in November and I think the most eye catching number here is everything german headline inflation will reach. assent in November, which of course, for european standards is quite a lot. At the same time, though, I think it's pretty compelling that this increase is not going to be so
First of all, a lot of these temporary factors that I talked about will drop out as you go into twenty two, so there's going to be a mechanical decline, vision, numbers and At the same time, we think the underlying inflation trend still very subdued. So when you cut through the noise in inflation data. What we see is that This trend is only about one descended and hasn't changed very much, and we think that there's a lot of slack in the Euro area and that going to take a long time for that underlying inflation trend, tougher and so, when you look ahead, we sang inflation will go up will only go up relatively gradually and we have quotation reach one. if the sand on a sustainable basis and not just on a one off basis at the end of it,
the twenty four and so help that still key below two percent and eight other view on these. You be, but I would also say that one and a half percent inflation on a sustainable basis. It was quite the better for Europe and what we ve seen over the last ten to twenty years. So much for joining us on the programming airy. Thank you now turned to which provide ski to discuss how the markets are. Pricing ended the european recovery which work under the programme a dragon, which we just spoke, Bulgaria Stain, who was quite optimistic about Europe's economic recovery, from your seat in global markets. Does them It share the optimism. I think we're really it's starting to see some european our performance for the first time and in a number of years now I think we will again here today is pretty clear. It asks why these action before about yes get asked ACT about this path and very often like it too.
composition of. What's the reading the rally bags autos chirrup, nearly thirty percent each and events in parts. The market, like utilities, are unchanged spin an entire, we value decomposed rally. It's been driven by you, consumption domestics, telling domestic see reflation yeah I would say we are definitely starting to see some signs of optimism. it's been a while, since investors it really want that to the geography and how, investors positioning for the recovery, I would say in general are flows, indicate quite substantial, abbot, Were banks, construction, broad, sit quality and value we ve seen a notable up checks in demand for Southern Europe, specifically ITALY. It does feel there is a bit
about domestic tilt towards the flow. There are probably some really good reasons for that in terms of the scope of the recovery find them in the direction of travel. In terms of some of the structural reforms that have come: the pandemic, but in general investors musician themselves with the more cyclical tales and given over all outside tendency for its value in European Joggerfys, certainly relative to you, ass. It's been expressed in those parts that are mentioned like the bags, where it's always been a bit of a love. He relationship must industrial bitch, you mention investor flows, digging little bit more in terms of what we are seeing in Europe versus the? U S, for example, so spin about content. of weeks inflows into gear up. It's been a while, since I've been able saying, like that in general, most portfolio, had been structured for a long time towards growth. They hold, sway,
I agree on the margin of away with a rush and within Europe we'd sailor Ben Episodes where macro funds coming change the geography I've had direction. It says and then come jumped the allocation melted. Well, if we look back, It was really the last french election in Riyadh Overwhelming sends a positive feedback and you're coming for you. If I got a benchmark, positioning. At that level we will probably town of ten. Then I would say if you look at implied, funding has come just in things like the broad Eurostar, we're seeing investors moderately long, maybe caught one two three I would say relative to a baseline of negative work. That's a rapid improvement, so we have seen positioning take up. I think if you work in our p b, which is our primary bridge, the measure of all things
Clyde transition. We have across our back its clear that Europe, means a relative underweight geography, verses most under geography, snuck in think all indications suggest that there is still a lot of room to go if investors. We feel that this is the geography that they need? Scholarship but ultimately a wanted. The optimism we heard from URI was just coming from declining called cases. Vaccine roll out what extent Does the marked a comfortable with the regions longer term growth prospects, which is This mentioned have ended up disappointing at points in the past, so. In other words, are people increasingly buying into a narrative at the outperformance form, come last, or does it more temporary to you and to be honest do you feel a lot of feedback is slightly more temporary nature. I think, certainly from them RO community has banned that the relative pace of recovery for Europe just makes it
much more appetising investments, and I do think that predicated on axe nation having very rapidly improve projectiles for Continental Europe? An she didn't. You asked where a large portion of reopening trade has already occurred so on rail. the basis. There's lots of rooms be very excited in terms of the slow but recovery, the slope of GDP improvement coming out of pandemic and are some structural arguments that are worth discussing, but the art events that are being put forward for Europe for the same reasons that are not caring for Japan Lookit, whereby stations are look at how their progressing and it's very clear, that there is a sharp pick up into my recovery that yet to come, that is bribes binding sure slightly more short termism. There are structural, events that under the directive and do not think we should address them one if you look at the last day,
returns? It's been predicated on DIS inflationary narrative. This idea that growth is scarce and hard to come by us, Gypsy and Investors have been allocating your very aggressive me to secular grove the arts in the market for multiple expansion is your group. we wanted, and that tend to favour the you asked that, since the paper tat an ethnic tension, to favour Europe Watch passed. So do you think There is perhaps a slight correlation and prompt parents causing well, but by the rise in interest rates as a whole in the structural, you and rates certainly benefit Europe. Geography and that has more to do with the banking sector and then the relative weight and the rules on the performance of european banks habits. and now investors think about making investments in Europe. There are other Orton structure arguments. I think that the pandemic has taken the bond amongst european
countries its forced, reformed grew in southern Europe and those reforms are bearing fruit in terms of large fiscal expansions that are predicated on structural reforms, so that Italian, For that I was referring to, I would share more money from the nature of the short term and with the view that the drugs policy will will carry forward much bigger, in back for a longer term changes. So you know, I guess it's not fair. For me to say it is purely short term in nature, but there are structural needs that I'm sympathetic to it is the clarify. Your perspective is that the markets do seem to be focused on these near term positive catalysts, but there are laws the term structural reasons to be more optimistic about the reach it absolutely. You know, I think, having traded through the sovereign crisis in two thousand and seven, there were multiple points where we thought no Europe will be pushed further apart and it certainly moved that ways for processing austerity. I think, from a very structural perspective, the Pandemic
can the fiscal expansion has brought it slightly closer together, and that has expanded. Maybe some of the structural fears about why investment here is always fraught with risk by the traders sitting in a trading seed. I probably here more of a short term arguments Walter once. Finally, you mentioned the Mccrone french election as a pivotal turning point in the markets. We always have some pretty important elections coming up in the region and the next year. We also has still a lot of unknowns about the virus variants and how will develop what are called I was worried about in terms of these types of risks. do you see as the most worrying risks and potential infection and for the region ahead, so request, few as early as our Europe look, I think, because I would like to make one I think in the near term, at the recovery trade in Europe is certainly predicated on that continued process of reopening backs nation. If we look at the U K we must not delay in reopening it was fairly well.
fact had soared. Uniting was reasonably well received, but I do think for Europe's specifically There is so much concern and if something like the delta variant were to pop up in european law, could be and have a similar issue delay recovery. You know that might be a very short term concern for the market, but one that I don't think it necessary priced, so something that I think we would probably be keep an eye on. in the medium term. There are quite a few elections coming up. I would say one. We have the german action in September, and this is not one that particularly, I think, seen as a risk at all for Europe, but it does have implications. I think, for the rates market depending on how prevalent Reed's underpinning and whether the blacks Euros is taken away and deference expansion becomes, how could it not within Germany, and so that will affect the relative rotation depending on your what what's good work, but not the more serious risk.
You're probably went up to ITALY in February around presidential election and your whether dry, reception presidential seabed. The causes are political reft, reasonably far enough away right now that report to concern, but it certainly something that will essentially be an issue and then the big one the french election, and no, we actually regional elapsed. coming up that will give us a guideposts as to how that progressing in the tree. You crazy terrorist errors that there will be a coalition, will last a fish off against Le Pen in the This round that takes matrona the picture, that's very, very unlikely and, of course, another penny or series of Le Pen, personal crowded. The sack roundworm apprised still very well expected to it, but you know Europe is politics. There are always surprises in twists and turns and tell those are no kind of it. neither were aware, as I think the As long as we continue to see a unified Europe wonders unified and fiscal expansion,
say the longer term prospects, the Geography library attracted start to move from fiscal expansion back into a version of austerity or aversion, though balanced books than once again Should we end up probably discussing some mathematics. We had in your report that the twenty tense, so you know, I think, certainly for my seat. The next few months look like a relatively clear guy path and you think Europe will benefit if waits do go higher, which I think is a fairly consensual. New Cross street Ultimately, I think that such a pretty well with what we ought to be discussed, vs, more confidence round the fat so all about. In short, I'm so gay swimming the wires and cherished art to emerge. So don't say from our perspective on the desk, the flows have been fairly struck. We remain constructive on the geography and I think that certainly been a more pro cyclical bats through the summer weight thanks for joining us, a budget,
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Transcript generated on 2021-08-08.