Euro Area Economic Forecast

Economic Snapshot for the Euro Area

September 27, 2017

German elections dent political optimism

Comprehensive data confirm that the Eurozone’s energetic recovery sped up in Q2, with GDP growing a seasonally-adjusted 0.6% quarter-on-quarter—above Q1’s 0.5% increase. Detailed data confirmed a broadening of the bloc’s growth drivers as a pick-up in external demand combined with a healthy domestic economy drove activity. The Eurozone has emerged as a bright spot in global growth this year—with GDP expanding at a clip that has been much faster than had been expected. Available data for Q3 also to paints a bright picture of the economy: Sentiment in the bloc is sky-high and the unemployment rate is resting at a multi-year low.

While the positive economic news flow has been reinforced this year by the region dodging political hurdles—a Brexit-induced slowdown, upset related to the French elections or risk of a summer default by Greece—the German election did not play out in the same vein. Angela Merkel’s CDU/CSU bloc suffered heavy losses in the 24 September vote, recording its worst result in decades. While Merkel’s alliance still hung on to win the most seats, ensuring a degree of policy continuity in Germany and the region, tough negotiations will be required in order to form a coalition government. At this time, the most likely outcome appears to be what in Germany is called a “Jamaica coalition” among the CDU/CSU, the FDP and the Green party. However, these parties’ platforms are quite different, which could pose challenges to effective ruling. In addition, the better-than-expected result for the far-right AfD could increase pressure within the CDU/CSU to move further to the right.

For the region, the implications of Merkel’s weaker-than-expected victory are unclear. Merkel has been a leading face in the Eurozone for years and a supporter of greater integration in the European Union, while this is unlikely to change, the different makeup of the German government could put the brakes on greater integration. Germany’s vote took place just days before France’s President Emmanuel Macron’s scheduled speech to elaborate on his plans for ambitious reforms to the European Union, which are focused around deeper integration. The euro came under pressure on 25 September following the German vote, reflecting the increased uncertainty. On top of a more fragmented German Parliament, a number of hurdles still lay in the path of the Eurozone including a separatist push in the north-east Catalonia region of Spain and a looming Italian election.

Growth to wane in 2018

The Eurozone is seen growing a buoyant 2.1% this year on the back of a healthier labor market, ultra-accommodative monetary policy and stronger global backdrop. Next year, activity is expected to decline somewhat, but still remain healthy, as tailwinds to growth ease. Our panel of analysts sees GDP expanding 1.8% in 2018, which is unchanged from last month’s forecast.

A number of the economies in the Euro area saw no changes to their 2018 forecasts this month, with stable outlooks for nine countries, including regional heavy-weights France, Germany and Italy. However, 10 economies saw their GDP forecasts lifted including Greece and Spain. None of the economies’ projections were downgraded.

Luxembourg and Slovakia are expected to be the fastest-growing economies in the region next year, expanding at rates of 3.5% or above. On the other end of the spectrum, Italy will be the region’s laggard, growing at 1.1%. Among the remaining major economies in the region, Spain will outperform the rest with 2.6% growth. Germany is seen expanding 1.8%, followed by France at 1.6%. 

See the full FocusEconomics Euro Area report

GERMANY | Economic outlook remains bright despite fragmentation of parliament in recent elections

Germany went to the polls on 24 September, timidly endorsing Chancellor Angela Merkel for a fourth term, with her CDU party receiving the largest share of the vote. The SPD, Merkel’s current coalition partner, suffered a humiliating defeat and has ruled out forming a coalition with the CDU, so it will take on the role of lead opposition party. The nationalist AfD party came in third place, marking the first time since 1960 a far-right party has entered the Bundestag. Ms. Merkel will now attempt to form a coalition with the Greens and the liberal FDP; negotiations could stretch into early next year. Markets reacted negatively to the news, and the euro had its worst day of the year. In the longer term, however, the election should have little impact on the Germany’s economic performance, which continues to benefit from solid fundamentals. Business and consumer confidence remain high, which has translated into robust retail sales and industrial production.

Economic growth is expected to be broad-based heading into next year. Tight labor market conditions should yield higher wage demands in upcoming collective bargaining rounds, while fixed investment should start picking up on the back of sustained business confidence. The external sector should also continue providing solid support, thanks to the global economic upswing currently underway. Our panel expects GDP will grow 2.0% in 2017. For 2018, the panel expects GDP growth of 1.8%, which is unchanged from last month’s forecast.

FRANCE | Macron pushes through expansive labor reforms

President Emmanuel Macron scored an important victory on 22 September when he signed his flagship labor reform bill into law in spite of protests and criticism over his use of executive powers. The reforms, passed by presidential decrees, will cap severance payments and make it easier for firms to lay off and hire workers to improve competitiveness, among other measures. These policies should rekindle faster growth in the medium term and provide further impetus to the economy if current dynamics persist. GDP growth for Q2 was confirmed at the 0.5% quarter-on-quarter increase reported previously, reflecting higher corporate investment, stronger growth in residential construction and healthy consumer demand supported by a strengthening labor market. The latest survey-based data from the third quarter and beginning of the fourth quarter is positive and suggests that the growth momentum will carry through the second half of the year.

The French economy is expected to accelerate this year and next on the back of strong domestic demand and growth in exports. A clear political panorama at home has generated optimism and is fueling robust growth in fixed investment, while low inflation and lower unemployment should provide a boost to private consumption. Panelists participating in the FocusEconomics Consensus Forecast expect GDP growth to accelerate mildly to 1.6% this year. For 2018, the panel also foresees growth of 1.6%, which is unchanged from last month’s forecast.

ITALY | Activity slowly builds, boding well for the troubled banking system

Italy’s economy seems to have gathered pace on the back of the broader recovery in the EU. Recently released data for Q2 shows that the economy posted a third consecutive 0.4% quarter-on-quarter expansion, underpinned by resilient household spending and a rebound in fixed investment, which is benefiting from lower corporate taxes. Data for the first two months of Q3 suggests the economy has broadly maintained its pace of growth. Moreover, both business and consumer confidence improved in August, and manufacturing PMI recorded its strongest reading in over six years on higher orders and output. The improved economic performance is benefiting the troubled Italian banking system, which saw its stock of bad debt falling in July to the lowest level since 2014. That said, growth remains weak compared to other Eurozone countries, and the economy continues to suffer from stagnant productivity growth and a heavy tax burden. Public debt also continued to rise in July.

Growth is poised to accelerate this year and broadly keep pace in 2018, underpinned by growing global demand, steady household spending and a prolongation of the recovery in fixed investment and industrial production. However, low international competitiveness and a bloated public sector will limit growth potential. The large stock of public debt also exposes Italy to financial vulnerabilities in the event of monetary policy tightening by the ECB. FocusEconomics Consensus panelists forecast a 1.3% expansion in 2017 and a 1.1% expansion in 2018, unchanged from last month.

SPAIN | Political tensions unlikely to hinder economic momentum

The economy has soared so far this year thanks to healthy domestic demand, an upturn in global trade and improved competitiveness in the country’s exports. However, leading data for the third quarter suggests that economic momentum may have begun to peter out: Industrial output and retail sales growth softened in July, while employment growth as measured by Social Security affiliations decelerated for a fourth consecutive month in August. The August manufacturing and services PMI readings also painted a picture of potentially weaker, albeit still strong, growth in the third quarter. All told, however, the economy should continue to grow at a healthy clip in Q3 in spite of heightened political tensions in Catalonia, where the regional government intends to hold a contentious independence referendum on 1 October.

Quarterly economic growth has repeatedly surprised to the upside, and our panelists now expect overall growth in 2017 to come in 3.1%, only a notch below last year’s figure. Next year, the economy is expected to cool slightly as some of the tailwinds continue dissipating. Panelists see growth of 2.6% in 2018, which is up 0.1 percentage points from last month’s forecast. An improving labor market will continue to shore up private consumption, while the external sector will be buttressed by relatively low labor costs. 

INFLATION | Price pressures rise in August

Click on image to see larger versioni

More complete data confirmed that harmonized inflation rose to 1.5% in August, from July’s 1.3%. Despite the rise, price pressures in the bloc still remain below the ECB’s target of just under 2.0% and the ECB made no changes to its monetary policy at its September meeting. The recent strong appreciation in the euro has complicated policy making for the institution. While robust economic activity has led to calls for tapering of the Bank’s bond-buying program, price pressures remain moderate and the currency’s strength is keeping the inflation outlook subdued.

The FocusEconomics panel sees inflation of 1.5% this year. Next year, inflation is seen averaging 1.4%, which is unchanged from last month’s forecast.

 

Get the full FocusEconomics Consensus Forecast Euro Area

Written by: Angela Bouzanis, Senior Economist

Sample Report

5 years of Euro Area economic forecasts for more than 30 economic indicators.

Download

Sample Report

Get a sample report showing all the data and analysis covered in our Regional, Country and Commodities reports.

Download

Start Your Free Trial

Start working with the reports used by the world’s major financial institutions, multinational enterprises & government agencies now. Click on the button below to get started.

Sign Up

Euro Area Economic News

Search form