A combination of political and economic headwinds facing the eurozone makes it the single biggest risk to global growth, Andrew Neil told delegates at sister publication Portfolio Adviser’s Northern Congress.
Delivering his keynote speech at the event in County Durham on Friday, BBC broadcaster and journalist Neil said the threat of deflation, deteriorating production, an escalating Brussels-Rome standoff and a confidence crisis among its key leaders was threatening a downturn in the bloc.
Neil told the audience of fund selectors that the eurozone had experienced a 1.9% reduction in its latest industrial production figures while core inflation is at 1% and falling. German growth forecasts have been slashed from 1.6% to 0.6%.
Elsewhere, 10-year German bunds are in negative territory at -0.23% which he said means investors would rather lock in a loss for 10 years than opt for riskier assets.
“Every five and six-year German maturity is now showing lower yields than three-month rates, that is all a sign of the danger of deflation,” he said.
“Every five and six-year German maturity is now showing lower yields than three-month rates, that is all a sign of the danger of deflation.”
He added: “That, to me, is a huge neon sign deflationary trap beckoning. That is dangerous and has to be avoided at a time when the European Central Bank has no real fire power left.”
Rome between a rock and a hard place
On top of that, Neil noted a looming budget battle between the “populists in Rome and the bureaucrats in Brussels”.
“The bureaucrats are putting Rome between a rock and a hard place. Either they [Rome] submit to the pro-cyclical demands of the European Union (EU) to cut their budget deficit going into recession, which some think is the economics of the mad house, or they defy Brussels and they will be punished by the bond markets.
“This has all the makings of a Brussels-Rome standoff which will have spillover effects in the other Club Med markets in the bonds of Spain, Portugal and Greece.”
Macron and Merkel paralysed
Neil said this is all happening at a time when there is a clear absence of leadership and direction in the EU in general and eurozone in particular.
“President Macron is paralysed by the activities of the gilet jaunes and in the European elections he came second behind Madame Le Pen. [Angela] Merkel is now among the walking wounded and there is now even talk her self-appointed successor AKK [Annegret Kramp-Karrenbauer] is widely not thought to be up to the job. Meanwhile, her Social Democrat partners who got thumped in the European elections are wondering whether they should continue in coalition.”
Neil said with both Paris and Berlin weakened and not even getting on that well with each other, a policy response is going to be difficult.
He added given this uncertainty, it is odds-on for the Germans to take over the ECB presidency because the past two have been Italian and French. “The next head of the ECB will be from the Bundesbank,” he predicted.
“For all these reasons I think the eurozone is the single biggest geopolitical risk to the global economy at the moment because the global economy at 3% growth is not strong enough to withstand a serious downturn in the European Union.”
However, Neil does not see Europe slipping into recession.
“My guess is the eurozone will muddle through; that it will just bounce along the bottom for the most of 2019. It will not tilt into a deep recession, but it is something to keep an eye on because what we know about deflation is once it gets a grip on you, it is a hell of difficult thing to break out of.”
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