The European Central Bank’s tightening approach suggests that eurozone growth for 2023 is likely weaker compared to 2022, according to the BNP Paribas Asset Management global fixed income Q3 outlook.
In its publication, BNP Paribas Asset Management said that the eurozone is experiencing a mild contraction but nonetheless demonstrating resilience despite challenges like an energy shock, high inflation and tightening monetary policy.
While the eurozone economy was more resilient than expected during the first half of 2023, the asset manager expected growth to stagnate over the next few quarters.
A mild slowdown in demand is unlikely to cause a significant increase in unemployment, as structural factors such as demographics and sectoral mismatch will likely keep the labour market tight, noted the report.
“This, alongside sticky core inflation, suggests that the ECB will maintain a hawkish bias until more evidence of sustained disinflation emerges,” said authors Oliver De Larouzière, CIO fixed income, and Daniel Morris, chief market strategist.
As headline inflation has peaked, and with the end of this current monetary policy tightening cycle in sight, investors may want to reallocate to Euro government bonds, according to the outlook.
The overall issuance needs from eurozone economies are at historical highs, and continued strength in the labour market and wage inflation in the absence of a sizeable external growth shock also pose upside risks to government bond yields.
“We expect German 10-year bund yields to settle in a higher range between 2.25% to 3.00% in the coming months,” said De Larouzière and Morris.
In the UK, core services inflation is unlikely to recede quickly, as upward wage adjustments in wage settlements will take time to manifest in the data, revealed the outlook.
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