Forex Flash: Reflationary policy to push GDP higher in the Eurozone – Merrill Lynch

Merrill Lynch analysts expect reflationary policy to succeed in pushing GDP growth into positive territory, albeit at low levels, with a return to positive GDP growth QoQ by 3Q13. “But for reflation to translate to sustained growth, closer to trend levels, structural policies (bank restructuring, regulatory reforms and completion of the union) need to be implemented: „ Reflationary policy in Europe was more modest than in the US but has proved successful in arresting the economic decline”, they wrote, expecting positive growth in 2013 H2 and at 1% in 2014, as well as positive inflation in the Euro area albeit below the ECB’s 2% target.

“Looking beyond the short term “reflation trade”, trend growth for the five main European countries is unlikely to recover to pre-crisis levels, but would lie between 1 to 2%, highest in the UK (2.1% down from 3.1% pre-crisis), followed by Spain (1.8% down from 3.7% pre-crisis) and France (1.4% down from 2.2 % pre-crisis), and lowest for Italy (0.7% down from 1.5%) and Germany (1.1% down from 1.6%) arising from ageing to a large extent”, they added.