After years of disappointing growth and stagnant inflation, 2017 will be the year that the European economy finally starts to motor on, beating the expectations of almost everybody, according to a research team from Credit Suisse.
“The euro area is set to deliver an upside growth surprise this year. Market expectations for growth are too low, in our view. Growth should strengthen on the back of stronger global trade and a pick-up in construction activity. It should remain supported by consumer spending, for which the fundamentals are improving,” Credit Suisse’s Anais Boussie and her team write in their European Economics note on Monday.
“Such a solid expansion should mean Europe’s financial fundamentals will also improve. Deleveraging is steady and well advanced. Bank asset quality is improving — NPL ratios should fall further in the coming year or so,” the note continues.
Signs from the single currency area have been largely positive in recent months. GDP growth has strengthened, inflation is back above 1% after spending a significant period at or below zero, and on Monday unemployment remained at its lowest level — 9.8% — since the tail end of the financial crisis.
These positive signs will continue to manifest themselves throughout the year, Credit Suisse argues. The bank then identifies 10 themes that it feels will characterise the eurozone economy in 2017, spanning everything from inflation continuing to rise, all the way to political risks from events like the French and Dutch elections being “contained.”
You can see the bank’s key European themes below:
- “A year of beating expectations” — As mentioned previously, Credit Suisse thinks the market consensus on eurozone growth in 2017 is too pessimistic. “We think that view is wrong, and markets are likely to be surprised by the resilience and vigour of euro area growth this year. We now expect GDP to rise by a sturdy 2.0%.”
- Consumer spending will continue to underpin the recovery — Instead of being fuelled by things like low oil prices, consumer spending will grow thanks to improving fundamentals like labour demand. “Labour demand is surging. Employment rose 1.3% last year, after a 1.0% rise in 2015. At the margin, that delivered a boost to labour income growth despite subdued wages. And there’s more strength to come.”
- “Momentum is building” in the construction sector — “Construction investment has contributed positively to growth for the past six quarters, and appears to be accelerating,” Boussie and her team write.
- Exports will be supported by favourable global conditions — While fears abound about what Donald Trump’s presidency could mean for global trade, Credit Suisse is positive, saying “it’s likely that global trade growth will improve after a couple of years of weakness. The global cycle looks to be at a modest inflection point. After a couple of years of slowdown, activity is accelerating, and the euro area should be a beneficiary.”
- Financial fundamentals will “continue to improve” — “Solid, resilient growth has consequences. It has created an environment in which many structural financial indicators have improved considerably, and will continue to do so. These favourable dynamics are apparent and important, but frequently overlooked by investors and commentators.”
- Inflation will continue to rise, with core inflation coming into focus — Headline inflation will surge off the back of rising oil prices, but core inflation will struggle to keep pace, Credit Suisse’s team writes. “The risk of deflation in the euro area has largely disappeared and headline inflation is set to rise sharply in the first half of 2017 as the strong dampening effect from past oil price declines fades away. In contrast, we expect core inflation, which excludes volatile energy and food prices, to pick up only gradually — and at a slower pace than the ECB projects.”
- The ECB will be “dull” — After announcing in December that it will continue its QE programme until at least the end of the year, the ECB is likely to avoid any fireworks in 2017, likely leaving its base interest rate unchanged and QE the same. “We expect little from the ECB this year,” Credit Suisse says.
- Fiscal stimulus will make an appearance, but it will be limited in scope — “Current assumptions suggest a positive contribution of fiscal policy to activity in 2017-18, although smaller than in 2016, when a significant boost came from refugee related expenses in Germany.”
- The political risk of the French election will be “contained” — Credit Suisse does not believe that the far-right Front National’s candidate Marine Le Pen has much chance of winning the presidency, limiting the chance for a further shock to the eurozone. Even if Le Pen were to win, the bank writes, “she would still have limited powers.”
- Political risks in the rest of the continent will fail to cause any major shock — With the likes of Le Pen in France, Geert Wilders in the Netherlands, and the Five Star Movement in Italy, risks to the political establishment are significant, but Credit Suisse sees little risk of any major upset from these actors. “We are not complacent and see political risks still building up — but as a tail risk for now. Overall, we don’t think forthcoming elections will deliver substantial political, financial, or economic shocks this year.”
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