Low growth, low inflation, low rates

We expect economic growth in the euro-zone to remain sluggish. This is partly due to adverse demographics and structural forces hampering the competitiveness of industry. But past monetary tightening will continue to weigh on investment and rate-sensitive consumption for some time. With wage growth slowing and energy prices likely to fall, we expect inflation to undershoot the 2% target next year. As a result, we forecast that the ECB will cut interest rates a bit further and faster than is discounted in the market. At the national level, growth will be weakest in Germany but public finances will be a growing concern in France and Italy. A re-run of the sovereign debt crisis is unlikely but the lack of political will to reduce the budget deficit in France and the legacy of high debt in Italy mean that spreads are likely to trend up and there is a risk of bigger adverse moves in the bond markets.