The Strategist

The European economy is at the peak of its recovery

05/16/2017 - 15:14

The European Commission has slightly raised its forecast for the growth of the euro area economy in 2017 - up to 1.7% from the expected 1.6%. The forecast for 2018 is confirmed at 1.8%. All members of the Eurozone, except Italy (0.9%), will show growth above 1% in 2017.

Jason DeRusha
Jason DeRusha
European economy has been recovering during five consecutive years, the report says, and the trend will continue in 2018. The growth is facilitated by the creation of new jobs, greater investor confidence, increased world trade, and the relatively low euro exchange rate. "The high level of uncertainty, characteristic for 2016, begins to decline," said European Commissioner for Economic Affairs Pierre Moskosvici.

The Eurozone continued to show positive dynamics in early 2017, and GDP grew by 1.7% in annual terms in the I quarter. The main driver is still private consumption (plus 1.1 pp), which has been growing at the fastest pace over 10 years, the report said. In 2017, the upturn will continue, and improved situation on the labor market will further accelerate growth.

In February, unemployment in the euro area fell to the lowest since May 2009. According to the European Commission’s forecast, in 2017 unemployment will decrease to 9.4%, in 2018 - to 8.9%, which is the minimum since the beginning of 2009.

Yet, the growth of consumption can be undermined by acceleration of inflation and, as a consequence, a decrease in purchasing power due to the unchanged level of savings. In 2017, inflation in the region will amount 1.6%, and in 2018 will slow to 1.3% against the background of a weakening effect of rising oil prices.

The increase in domestic demand can also be prevented by tightened credit conditions due to a gradual reduction in the ECB’s stimulus program, warned UBS analysts. Actions of the ECB caused the euro area economy’s quarterly growth to decline, they note. According to UBS’ forecast, GDP of the Eurozone will grow by 1.7% in 2017, and by 1.4% - in 2018.

The EU economy is at the peak of growth, analysts interviewed by the WSJ say. Portugal, Spain and Ireland, the most affected by the financial crisis in the EU, are showing growth of 1.8 to 4%, analysts of the European Commission write. Even the Greek economy, which forecast is worsened by the delay in approving the second package of financial assistance, will be growing by 2.1% (the previous forecast is 2.7%). Spain and the Netherlands will be recovering faster than average Eurozone countries, while Germany, France and Italy - more slowly, according to the European Commission’s report. Spread in the rate of growth in various countries of the Eurozone is declining, says Peter Praet, Chief Economist at the ECB (quoted by WSJ).

The growth peak will slow its pace soon, writes WSJ. Current rates are close to 2% and are significantly higher than the potential growth rates of production, explain UBS analysts. Without structural reforms, it will be difficult to achieve growth rates above 2%, they note.

The upturn may be supported by investment recovery due to a decrease in uncertainty, the European Commission indicates. Political and economic uncertainty is one of the key factors, it almost by one-third determines fluctuations in GDP and investment, and by 15 % - consumption, the report says. Elections in the Netherlands and France have passed, the parliamentary elections in Italy will be held in 2018 and the ECB has an opportunity to act, say analysts of ING. According to their forecasts, the regulator may begin to wind down the incentive program to complete it in June 2018.


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