Allianz remains upbeat, predicting euro area growth of 1.6% and financial markets improving

Allianz is predicting a positive story for Europe next year, with growth at 1.6% across the eurozone, led by the economic powerhouse of Germany.

Allianz chief economist Michael Heise said: "The upswing seen in recent quarters was mainly thanks to the rebound in world trade. Government stimulus packages also helped. In 2011 public and private sector austerity drives will weigh on the economy. Nonetheless, Allianz believes the upward trend in the euro area will continue.

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

"The gap in growth from country to country will still be considerable, if not quite as glaring as in 2010. In 2011 Germany is again likely to lead the way with growth of 2.6 percent, while Greece will again bring up the rear with a 2 percent decline in GDP.

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

“The stability of the eurozone is the top issue in 2011. Germany has reaped enormous advantages from the single currency. Policymakers must not cast doubt on the euro. Without the euro the current economic situation in Germany would not be as good as it is. Germany therefore has a lead role in stabilizing the single currency,” said Heise.

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

Heise: “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.”

On the basis of fundamental macroeconomic models, the economists at Allianz are broadly upbeat about the outlook for the stock markets.

Allianz sees the DAX at 7,500 points at the end of 2011 and the Dow Jones at well over 12,000. On the bond markets Allianz predicts only a moderate rise in yields.