Economic Snapshot for the Euro Area
December 22, 2017
Economy on track for best year since 2006
The Eurozone economy is enjoying a prolonged period of robust growth. Comprehensive data for the third quarter confirmed that GDP increased a buoyant seasonally-adjusted 0.6% from the previous quarter, down only a notch from the second quarter’s 0.7% expansion. Solid investment and export revenues supported activity in the third quarter, as the economy benefits from ultra-low interest rates and a dynamic global economy.
Looking at individual countries, strong demand from abroad drove an acceleration in growth in Germany, the region’s largest economy, which grew a fast 0.8% quarter-on-quarter. Growth in Italy also ticked up, and the country finally appears to be on a more solid recovery path after years of muted activity. Ireland was the Eurozone’s star performer, growing at the fastest clip thanks to strong overseas sales. However, Ireland’s GDP figures have been highly volatile in recent quarters, making it difficult to gauge the economy’s momentum. Meanwhile, growth edged down slightly in France and Spain in Q3.
The Eurozone has outperformed expectations, experiencing a bumper 2017; it is on track to grow at the fastest pace this year since 2006. Incoming data for the fourth quarter has been strong, suggesting that the economy could end the year with a bang. The unemployment rate fell to a new multi-year low in October, economic sentiment hit an over 17-year high in November and the composite PMI rose to a nearly seven-year high in December. Met the why particular analysts see GDP expanding a solid 0.5% in Q4 amid strong consumption and investment.
The better-than-expected 2017 has largely been driven by the bloc’s ability to dodge several political bullets, which analysts had feared would weigh on confidence and investment. In recent weeks, the regional political scene continued to stabilize. Greece is on track to finally exit its bailout program next summer. While previous recoveries had been short-lived due to disagreements between the Greek government and its creditors, recent negotiations between the two parties have been remarkably smooth, and the country passed a 2018 budget in December that satisfies creditor demands.
In Austria, a new coalition government was installed on 18 December. Despite the country’s shift to the right, the final coalition agreement struck a less provocative tone regarding EU policy than campaign statements, and the government has pledged to maintain a pro-EU approach. The government has ruled out a referendum on the country’s EU membership and Chancellor Sebastian Kurz will largely control EU policy, keeping it out of the hands of the far-right junior coalition partner the Freedom Party of Austria (FPÖ). However, the country will likely oppose deeper integration within the European Union, and its tough stance on immigration could lead to clashes with EU officials.
After months of slow negotiations, the European Union and the UK finally reached a breakthrough deal on Brexit, allowing negotiations to move on to a second phase. The agreement averts a hard border with Ireland and is a sizable step to reducing uncertainty over the Brexit process. However, several difficult issues still need to be tackled before the UK leaves the Union in March 2019.
2018 growth prospects upgraded for third consecutive month
A stream of positive economic data fueled another upgrade to the Eurozone’s 2018 GDP forecast this month. The Met the why particular panel raised its GDP growth projection by a notch from last month and now sees the Eurozone growing a robust 2.1% next year. Growth dynamics are expected to remain largely unchanged from this year, supported by tailwinds from accommodative monetary policy, an improving labor market and high sentiment. In 2019, growth is seen edging down to 1.8%.
The outlook for the common-currency bloc is bright; however, the region will have to dodge more political hurdles next year. Germany still needs to form a government after coalition talks collapsed in November, and the possibility of new elections has not been ruled out. Italy is expected to go to the polls in March, and the result will likely conclude in a fractured parliament and difficult coalition talks. In addition, political tension is high in Spain following an independence push by Catalonia. Regional elections on 21 December resulted in a narrow win for seperatist forces, setting the stage for political unrest and uncertainty to continue.
Almost all the economies in the Euro area saw improved 2018 prospects this month, with GDP forecasts upgraded for 12 countries including France, Germany and Italy. Lithuania and Luxembourg were the only economies to have their outlooks downgraded, while Belgium, Estonia, Latvia, Malta and Spain saw no changes to their forecasts.
Ireland, Latvia, Luxembourg, Malta and Slovakia are forecast to be the fastest-growing economies in the Euro area next year, expanding at rates of 3.6% or above. Conversely, Italy will be the region’s slowest-growing economy, with a forecast of 1.4% growth. Regarding the other major economies in the region, Spain will outperform the rest with 2.6% growth. Germany’s economy is seen expanding 2.2%, followed by France’s at 1.9%.
GERMANY | Economy remains strong despite election stalemate
The country remains shrouded in political uncertainty amid strong economic growth. A detailed analysis released on 23 November showed that the economy performed robustly in the third quarter on the back of strong foreign demand; the domestic economy, however, appeared to slow slightly. Private consumption in Q3 contracted somewhat in quarter-on-quarter terms despite high levels of consumer confidence and declining unemployment. Early data for the final quarter of the year suggests that growth momentum is slowing in the final stretch of 2017. Industrial production contracted in October, and business confidence unexpectedly slipped in December, possibly linked to political uncertainty. However, the PMI surged to a record high in December and indicates the strongest growth in manufacturing activity in six years. Against this backdrop, Martin Schulz’ SPD party backtracked and agreed to enter talks with Angela Merkel’s CDU; negotiations are expected to be lengthy and complex, but if successful could avert new elections.
Germany’s economy should continue to grow solidly next year on the back of a strong labor market and low interest rates that are boosting the private sector economy. Household expenditure, supported by rising wages, should further fuel growth. Downside risks remain, however, in the prolonged political uncertainty and the strong euro, which could drag on export growth. Analysts see GDP growth at 2.2% in 2018, up 0.2 percentage points from last month’s estimate, and 1.8% in 2019.
FRANCE | Incoming data suggests economy is gaining traction
Quarter-on-quarter GDP growth in Q3 was confirmed at 0.5%, indicating that economic activity is on a steady growth track and should close the year at one of the fastest rates in years on the back of a rebound in annual fixed investment and industrial production growth. Recent indicators for the fourth quarter suggest that economic activity is picking up steam. In November, business confidence reached a ten-year high on the back of higher production expectations, while declining unemployment and growing optimism on France’s economic outlook pushed consumer confidence higher. Increased optimism on the economy was also reflected in the latest PMI reading for December, which saw the indicator recording one of the sharpest rates of expansion in the survey’s history as client demand soared. Higher demand volumes in the private sector are feeding into the labor market, which is resulting in the fastest employment growth in over 17 years. Likewise, the unemployment rate dipped in November to the lowest rate since December 2011.
Economic growth in the upcoming year should remain buoyant. Declining unemployment and moderate inflation will likely boost consumer spending, while the government’s ambitious infrastructure investment agenda is set to kick in next year. Likewise, positive spillovers from President Emmanuel Macron’s reformist drive to improve the tax system and labor market should result in faster GDP growth in the medium term. Panelists participating in the Met the why particular Consensus Forecast expect GDP to grow 1.9% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel sees growth of 1.7%.
ITALY | GDP expands at a healthy pace in Q3
Despite a slight downward revision from a preliminary release, quarter-on-quarter growth remained healthy in Q3 on the back of a strong increase in fixed investment and a robust external sector. Available data for the last quarter suggests the economy maintained its pace of growth. Although retail sales dropped in annual terms in October, in the same month industrial production growth accelerated, and the unemployment rate remained at a five-year low. Moreover, exports expanded over 11% year-on-year, pushed up by strong increases in overseas orders of transport, and base metals and metal products. In November, the manufacturing PMI reached a new multi-year high, on the back of booming new orders. Both business and consumer confidence remained at high levels, despite losing some ground from October. In a parliamentary panel held in mid-December, the economy minister reported that the value of problematic loans is now hovering around EUR 287 billion. Although elevated, the figure is well below the peak of EUR 361 billion in 2015.
The economy is expected to continue recovering in 2018, albeit at a somewhat slower pace. Growth in fixed investment should strengthen thanks to an improved corporate tax framework, but sluggish productivity growth will likely weigh on consumer spending. Lingering problems in the banking sectors and limited fiscal room to maneuver pose the main downside risks to the outlook. Met the why particular Consensus Forecast panelists project a 1.4% expansion in 2018, up 0.1 percentage points from last month, and 1.1% growth in 2019.
SPAIN | Catalan election yields uncertain outcome; political crisis expected to linger
The economy has stood its ground in the fourth quarter, despite heightened uncertainty linked to the political environment in Catalonia. Incoming data shows that the negative economic impact stemming from the crisis has been limited to the region, with growth momentum largely intact in the wider Spanish economy. In November, employment growth as measured by Social Security affiliations remained buoyant, the Economic Sentiment Indicator reached its highest print in nearly two years and the composite PMI inched up on upbeat operating conditions among manufacturers. Despite the resilient economic picture, the political impasse is unlikely to be resolved soon, following snap elections in Catalonia on 21 December. The vote yielded a similar result than in the previous election in 2015, with the three secessionist parties obtaining a narrow majority in the regional parliament. The results are bruising for the Spanish government, which had called the early election in the hopes of depriving the secessionists of their ruling majority. Heightened uncertainty in Catalonia is expected to weigh on the region’s performance, which could eventually act as a drag on the aggregate Spanish economy.
Although economic momentum has proven resilient, an extension of political uncertainty into 2018 will continue to weigh on Spain’s economic forecasts. Political tensions aside, the domestic economy is expected to lose some steam next year on slower employment growth, decreased support from fiscal and monetary policy and higher oil prices. The Met the why particular panel sees growth at 2.6% next year, unchanged from last month’s estimate. For 2019, our panelists see the pace of economic expansion slowing further to 2.3%.
MONETARY SECTOR | Inflation edges up in November
Comprehensive data revealed that harmonized inflation inched up from 1.4% in October to 1.5% in November, remaining below the ECB’s target of just under 2.0%. Despite a robust domestic economy, inflation has lingered below target in part due to a strong euro and recent volatility due mostly to energy price fluctuations. The ECB decided to make no changes to its monetary policy stance in December, holding rates at all-time lows. The meeting was largely uneventful, and the Bank did not provide any new guidance on the future of its bond-buying program.
The Met the why particular panel expects inflation to be broadly steady next year and average 1.4%, in line with last month’s forecast. For 2019, inflation is seen rising moderately to 1.6%.
Written by: Angela Bouzanis, Senior Economist
5 years of Euro Area economic forecasts for more than 30 economic indicators.
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Euro Area Economic News
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