Euro Area: Economic Snapshot for the Euro Area
February 28, 2018
Growth continues to cruise at fast pace in Q4
The Eurozone economy continued its spell of robust growth in the final quarter of 2017, capping off the best year of expansion in over a decade. Preliminary estimates revealed that GDP increased a buoyant seasonally-adjusted 0.6% from the previous quarter in Q4, down a notch from Q3 2017’s 0.7% increase. While a breakdown by components is not yet available, the Eurozone’s growth story is expected to have remained largely unchanged, with high sentiment, improving labor markets, ultra-accommodative monetary policy and a strong global backdrop propelling fast growth.
Looking at the individual countries for which data is available, GDP growth was robust in Germany in the fourth quarter, albeit down a notch from the previous quarter’s pace. Strong foreign demand for German goods and services was largely behind the robust result. Similarly, Austria, Italy and Spain’s economies lost momentum slightly but remained resilient overall. Conversely, the French economy closed out the year on a strong note, gaining steam. Portugal’s economy also accelerated.
As the regional economy continues to hum along, political events remain in focus ahead of “Super Sunday” on 4 March. Italy will head to the polls, and the result of the SPD vote over whether to join a German coalition government will be unveiled. While the events concern two of the largest economies in the Eurozone and have the potential to usher in a period of uncertainty if they go awry, so far the Eurozone economy has shrugged off political uncertainty, and it appears unlikely that a surprise outcome could dent the current momentum.
In Italy, the election is expected to yield a fragmented political landscape, with laborious coalition negotiations ensuing. A fragile centrist coalition appears to be the most probable outcome. The situation will likely not bode well for bold reforms to correct the country’s weak fiscal position and structural issues, meaning that growth could continue on a sluggish path. On the other hand, it should not derail the progress the country has made so far, and an extreme outcome, policy reversal or Eurosceptic party seizing power appears unlikely.
A “yes” vote by the SPD will renew Germany’s Grand Coalition, averting fresh elections and ushering in a period of policy continuity. The coalition agreement is devoid of major reforms but should take a broadly pro-European stance, while continuing to balance Germany’s books. If the SPD members reject the proposed coalition renewal, Germany will be set for rerun elections or a minority government, unchartered waters in recent German history.
Euro area’s prospects upgraded for fifth consecutive month
This month, the FocusEconomics panel upgraded the Eurozone’s 2018 GDP forecast for the fifth month running as the stream of positive data shows no sign of slowing. Household consumption should benefit from higher employment and rising real wages this year, while accommodative monetary policy bodes well for investment. A strong global backdrop is also a good sign for the bloc’s exports; however, a strong euro may take some wind out of the external sector’s sails. All-in-all, FocusEconomics analysts see GDP growing a solid 2.3% in 2018, up 0.1 percentage points from last month’s projection. In 2019, growth is seen moderating to 1.9%.
The majority of the Euro area economies experienced an upgrade this month to their growth projections for 2018, including Germany, France, Italy and the Netherlands. Luxembourg was the sole economy to have its outlook downgraded. Four economies, including Spain, saw no changes to their forecasts.
Ireland and Malta are forecast to be the region’s top performers this year, growing 4.1% and 4.2% respectively. Conversely, Italy will be the region’s laggard, expanding a modest 1.5%. Regarding the other major economies in the region, Spain will outperform the rest, with a 2.7% expansion. Germany’s economy is seen increasing 2.4%, followed by France’s at 2.1%.
GERMANY | Economy starts 2018 in excellent health
A detailed breakdown of GDP for the final quarter of 2017 confirmed a preliminary estimate and brought growth for 2017 overall to the fastest clip in six years. Economic activity in the fourth quarter remained solid on the back of robust foreign demand; however, domestic demand weakened from the previous quarter. The current positive momentum in the economy likely spilled over into Q1 2018, according to early data. Unemployment reached its lowest level since reunification in January, while business and consumer sentiment remained elevated in the first two months of 2018. On 7 February, the CDU and the SPD parties finally reached a coalition agreement to form a new government, which incorporates increased public expenditure but will still maintain a balanced budget. The deal, in which the SPD will gain control over the finance ministry, is subject to approval by party members, and the result of the vote will be made public on 4 March.
While the rejection of the coalition deal would increase short-term uncertainty, the economy is nonetheless expected to record another year of solid growth in 2018 on the back of buoyant private consumption, fixed investment and external demand. Low and middle-income earners and pensioners should benefit from some fiscal measures of the expected coalition. However, a downside risk from a strong euro persists, which could drag on export growth. Analysts see GDP expanding 2.4% in 2018, up 0.1 percentage points from last month’s estimate, and 1.9% in 2019.
FRANCE | Robust investment fuels uptick in growth in Q4
Preliminary GDP data show that the French economy closed 2017 on a spectacular note, highlighting that the economy is benefitting from the global economic upswing and strong confidence from Macron’s business-friendly policies. Quarter-on-quarter growth in Q4 accelerated on the back of a rebound in the external sector and buoyant growth in the domestic economy. Fixed investment spearheaded the uptick as high business confidence supported an increase in capital spending. While growth in private consumption decelerated in Q4 compared to the previous quarter, it expanded at a healthy pace buoyed by multi-year low unemployment, moderate inflation and elevated consumer confidence. The strong economic momentum likely carried over into the beginning of the year with survey-based data remaining at above-average levels.
The economic outlook is bright. Buoyant economic activity will contribute to reducing unemployment further, which in turn should feed into higher income growth and strong private consumption. The 50-billion euro investment fund to be launched this year, along with changes in the country’s taxation laws, will foster investment growth. The external sector will also reap the benefits from strong growth in the eurozone. Panelists participating in the FocusEconomics Consensus Forecast expect GDP to grow 2.1% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel sees growth of 1.8%.
ITALY | Banking sector shows signs of improvement as Italians head to the polls
Italian voters will elect a new parliament on 4 March. Although polls suggest that a centrist grand coalition is the most likely outcome, a center-right government is not outside the realm of possibility. While Italy is in dire need of deep economic reforms as the pace of growth remains well below that of its European peers, it is unlikely bold reforms will be implemented. Nevertheless, the economy is faring reasonably well, and GDP growth continued at a decent pace in Q4 despite losing some steam. Moreover, recent survey-based indicators suggest that economic growth has been broadly stable in Q1. In January, business and consumer confidence remained elevated, despite weakening, and the manufacturing sector continued to see robust expansions in output and new orders. While concerns over the banking sector persist, the situation appears to be improving: The volume of Non-Performing Loans continued to decrease in December, down more than a quarter from the previous year’s peak.
The recovery is expected to continue this year, but the pace of growth is foreseen remaining sluggish. Fixed investment, which is down more than 20% from its pre-crisis level, is expected to expand on favorable financing conditions and an improved fiscal framework. Moreover, declining unemployment and low inflation should underpin household spending. However, political uncertainty following the March elections could translate into heightened financial instability. Analysts project growth of 1.5% in 2018, up 0.1 percentage points from last month, and 1.2% in 2019.
SPAIN | Growth unfettered by Catalonia’s independence push
A preliminary release shows the Spanish economy successfully weathered the uncertainty stemming from Catalonia’s push for independence in the fourth quarter, with GDP growth decelerating only marginally to a 0.7% increase in quarterly terms. Although a breakdown of data is not yet available, high-frequency indicators suggest that growth was largely broad-based, with the external sector gaining from an upturn in global trade and domestic demand benefiting from accommodative monetary conditions, an improving labor market and upbeat business sentiment. Incoming data for the first quarter remains similarly positive: In January, employment growth—as measured by Social Security affiliations—continued to expand at a solid clip, while the composite PMI for the same month showed a marked improvement in business conditions. A rosy economic landscape, coupled with political concerns over Catalonia’s secession having been reduced, likely contributed to an improvement in the European Commission’s Economic Sentiment Indicator for Spain, which hit an over two-year high in January.
Although political noise will persist over Catalonia’s attempt to gain independence, the economy is expected to remain resilient this year. Household spending will expand at a solid pace on the back of low borrowing costs and steady employment growth, while fixed investment growth will decelerate only slightly as companies retain an optimistic outlook for the economy. Our panel sees growth at 2.7% this year, up 0.1 percentage points from last month’s estimate. For 2019, our panelists foresee growth of 2.3%.
MONETARY SECTOR | Inflation inches down at start of 2018
Comprehensive data confirmed that price pressures eased slightly in the Eurozone in January. Inflation edged down from 1.4% in December to 1.3%, below the ECB’s target of just under 2.0%. Despite a strong economy, price pressures remain weak, and a strong euro is likely to keep inflation moderate going forward, complicating policy making for the ECB.
The ECB board’s 2018–2019 shakeup began in recent weeks, which will see broad turnover across the organization. Spanish Economy Minister Luis de Guindos secured the role as the next ECB Vice President, despite a lack of Central Bank experience. The choice of a VP from a southern economy increases the chances that President Mario Draghi’s successor could be from a northern country, when elected next year. However, the recent decision is unlikely to impact monetary policy in the near-term.
The FocusEconomics panel expects inflation in the Eurozone to be broadly steady this year and average 1.5%, unchanged from last month’s forecast. For 2019, inflation is seen rising slightly to 1.6%.
Written by: Angela Bouzanis, Senior Economist