Forex Flash: Euro outlook 2013-16 – A long grind as economies adjust – Goldman Sachs (Barcelona) - The economics team, lead by Huw Pill, believe that a ´long grind´lies ahead with area-wide stagnation a likely effect.

They believe that the effects of public-sector austerity and private-sector deleveraging have seen the Euro area return to recession in 2012. They expect the recession to continue into next year and have revised down their area-wide growth forecast for 2013 from 0.1%yoy to –0.2%yoy. Financial conditions have played an important role, yet they have eased this year – due to enacted and prospective ECB policy – and that has prevented a sharper contraction in output triggered by financial distress.

They believe that balance sheet adjustment by both public and private sectors is, however, unavoidable, and has weighed on growth – especially in the periphery. They believes that financial conditions have contributed to divergence through the segmentation of financial markets. There has also been a good side to the resulting divergence: economic adjustment is under way.

They finish by stating that ECB policy will aim to reduce the role of market segmentation that has contributed to both area-wide stagnation and divergence. They expect it to do this through targeted measure, including OMTs.