The Eurozone is expected to continue its twin-speed recovery with core countries - particularly Germany - experiencing faster growth relative to peripheral Europe’s weaker growth, Pimco has claimed in its economic outlook for 2011.

Andrew Balls, Managing Director, Head of European Portfolio Management, Pimco explained: “While Germany is doing very well, it is not likely to grow strongly enough to significantly boost growth in the peripheral countries. And the ongoing crisis in the Eurozone peripheral countries is a source of risk for the European banking system and for growth across the continent. Hence, we expect subdued growth in the Eurozone overall.”

Pimco’s 2011 economic outlook has predicted 2011 real growth in the Eurozone of 0.5%–0.75% and growth in the UK of 1.0%–1.25%.

It also has significant concerns over the Eurozone countries’ ability to maintain austerity programmes into the medium term.

Having core and peripheral Eurozone countries trying to tighten fiscal policy at once suggests the impact of fiscal policy on growth – whether helping or hindering – may be greater than the standard historical rules of thumb, Balls explained.

The threat of a banking crisis in the event of one or more European government defaults also remains a significant source of macroeconomic risk, he added.

However, Pimco forsees a wide range of possible outcomes for the Eurozone. Balls explained: “It is possible that European countries will make successful fiscal adjustments, helped in part by stronger external growth. We may see the successful quarantining of Greece, Ireland and perhaps Portugal via European Union support and International Monetary Fund rescue packages, or perhaps the restructuring of some sovereign debt over time to prevent full-blown contagion to larger peripheral countries, namely Spain and Italy.

“But at the other end of the spectrum we have to take seriously the risk of one or more disorderly defaults and the possibility that countries may exit the Eurozone.”

Share Story: