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Euro-area economic boom to roll on after strong start to 2018

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The 19-nation region has started the year with a string of positive numbers, including stronger business sentiment in Germany and France, its biggest economies. Having long cast off its "sick man" tag, the improvements have given fresh impetus to the European Central Bank's hawkish policy makers to push for an end to crisis-era stimulus.

[ATHENS] Europe's growth resurgence is showing little sign of losing steam yet and economists have taken notice.

In Bloomberg's monthly survey, the first of the year, respondents bumped up their 2018 outlook to 2.2 per cent, close to the decade-high 2.4 per cent pace estimated for last year. The optimism is in contrast to the muted view at the start of 2017. Economists back then saw momentum slowing, but had to keep upgrading projections to keep up with the economy's performance.

The 19-nation region has started the year with a string of positive numbers, including stronger business sentiment in Germany and France, its biggest economies. Having long cast off its "sick man" tag, the improvements have given fresh impetus to the European Central Bank's hawkish policy makers to push for an end to crisis-era stimulus.

"This current cycle has plenty of fuel left in the tank," said Angel Talavera, an economist at Oxford Economics in London. "The rebound in the hard numbers provides a more consistent growth picture for the eurozone."

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The ECB has acknowledged the upturn, saying in comments published last week that it sees an "increasingly self-sustaining" expansion.

The document, an account of its December policy meeting, also said Donald Trump's US tax cuts could have a greater than expected impact on euro-area growth. 

There was also a hint that its guidance on future policy actions could be revisited early this year. But with inflation still undershooting the goal of just below two per cent, any changes will be gradual. Economists see consumer-price growth averaging 1.5 per cent this year and 1.6 per cent in 2019, and no interest-rate increases until 2019.

As the economy improves, that's given a lift to the euro, which is already up about 1.6 per cent this year after a 14 per cent jump in 2017. There's a risk that could weigh on growth and suppress headline inflation.

Euro-area industrial production rose more than forecast in November and unemployment continued to slowly decline. A Purchasing Managers Index of activity increased to the strongest in seven years in December.

In Germany, the region's biggest economy, business confidence is near a record high. That's despite a political impasse that's left Chancellor Angela Merkel unable to form a new coalition government since elections in September. There has been some progress, however, with her party reaching a preliminary accord with the Social Democrats late last week.

Risks Ahead

The Bloomberg survey shows the breadth of the expansion, which some have dubbed the "Euroboom". The latest predictions are that Germany, France and Spain will all grow two per cent or more this year. In Italy, where elections are one of the key risks, expansion may slow to 1.4 per cent from 1.6 per cent, though that's still far above the average over the previous five years.

Strength in the eurozone's core economies is even set to help Greece, the country worst affected by the region's debt crisis. German tour operator TUI says bookings for Greece were up 16 per cent this year, a sign the tourism sector will continue to buoy the economy as it awaits much-needed investment. Economists see Greek gross domestic product growing 2.2 per cent this year.

At NordLB in Hanover, Christian Lips currently predicts an above-consensus 2.5 per cent expansion for the euro area - thanks in part to ECB support - though he's not sanguine about potential pitfalls.

"We are optimistic for 2018 and expect the upswing to continue with similar momentum," he said. "However, the currently positive corporate and consumer sentiment should not obscure the fact that the forecast for 2018 is subject to considerable risks, including geopolitical conflicts, political risks, Greece, elections in Italy."

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