The weakness in euro activity in 2014 was due to external factors, which affected business sentiment and implied companies stepped on the brakes.
This implied investments declined while inventories were reduced, although private consumption and exports continued to increase.
There is evidence that uncertainty is fading and the business cycle has bottomed, hence we expect investments will slowly start to increase.
The recovery should continue to be supported by increasing private consumption due to the oil price drop and higher exports due to stronger global growth.
France and Italy remain weak links and we expect very low growth in these countries going forward, but it should not prevent an overall euro recovery.
Risk factors to our outlook for stronger growth are the Greek election and further weakness in Russia.
Even as growth recovers, the market is not set to price in many ECB rate hikes in the coming three to four years given the elevated level of unemployment.
Hence, in our view there is currently very limited risk of higher EUR rates sub 5Y. Looking further out on the curve, it could steepen from the very long end.
We expect EUR/USD to rebound following H1 weakness, as FX markets are likely to be taken by surprise by the euro-area recovery that we envisage.
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