Austerity drives to slow growth but upswing will prevail says Allianz

The eurozone will record a predicted 1.6% growth in 2011, the insurer predicts, and a positive trend in financial markets is expected with Germany‘s DAX index at 7,500 points at the end of 2011 and the Dow Jones at ‘well over’ 12,000.

The upswing seen in recent quarters was mainly thanks to the rebound in world trade, Allianz said in a statement, but in 2011 public and private sector austerity drives will weigh on the economy.

“The drivers of the upswing will continue to prevail. However, the momentum of the recovery will remain subdued. Following growth of 1.7% in the euro area this year, we expect gross domestic product to increase by 1.6% in 2011,” said Mr Heise.

The gap in growth from country to country will still be considerable, if not quite as glaring as in 2010, Allianz said.

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In 2011 Germany is again likely to lead the way with growth of 2.6%, while Greece will again bring up the rear with a 2% decline in GDP.

Europe faces a host of economic policy challenges, with stability of the eurozone the uppermost priority, warned the insurer.

According to Allianz, several measures are needed to place the eurozone on a permanently stable footing.

The prompt introduction of the new deficit proceedings with swifter sanction mechanisms for fiscal miscreants, the rapid fleshing out of the proposed early warning system for macroeconomic imbalances and early clarification of the shape and form of the European Stability Mechanism from 2013.

In addition, the Euro Group needs to communicate clearly to the markets that the eurozone is not under threat and that sovereign defaults are not inevitable.

“The eurozone will cope with a phase of elevated spreads for countries like Spain or Italy. Dangling the prospect of further assistance now would be an invitation to the financial markets to snap it up,” said Mr Heise.