Eurozone enjoys better times
Risks remain, but currency bloc on track for fastest growth in a decade
Even as events in Catalonia are a reminder that political risks remain, the euro area’s year of living dangerously is turning out well.
On track for the strongest expansion in a decade and with consumer and business confidence at their highest since before the financial crisis, the 19-nation currency bloc is emerging as fertile ground for dealmakers, investors and executives.
“The wind is well and truly back in the sails of Europe,” says Simon Wells, chief European economist at HSBC Holdings. “The question for investors I suppose is: can this continue?”
The upbeat economic outcome wasn’t at all certain at the start of the year, when the shockwaves from votes for Brexit and Donald Trump prompted warnings that the euro area would be the next to witness a populist surge that could splinter the currency bloc.
Catalonia’s independence referendum showed that the risks are far from over.
Yet they have largely abated. Dutch populists were defeated in elections. German Chancellor Angela Merkel has to deal with a rise in support for the far right but she’s still readying for a fourth term in power. French President Emmanuel Macron is pushing a reform programme and fellow European Union leaders are planning deeper integration.
“For the euro zone as a whole, the possible Catalan impact will probably be too small to make a noticeable difference,” says Holger Schmieding, chief economist at Berenberg in London.
The European Central Bank forecasts an economic expansion of 2.2 per cent this year, enough to persuade president Mario Draghi to consider slowing the institution’s extraordinary monetary stimulus.
A purchasing managers survey published this week confirmed that private-sector manufacturing activity accelerated last month, and showed factories scrambling to add staff. Unemployment held at 9.1 per cent for August, slightly weaker than economists estimated — and more than twice as high as the UK or US — but still the lowest since 2009.
Investors have responded by pushing the Stoxx Europe 600 index up more than 7 per cent this year, headed for the strongest gain since 2013. European takeovers have jumped 41 per cent to $526 billion, according to Bloomberg data.
The wind is well and truly back in the sails of Europe. Simon Wells, chief European economist, HSBC
Consumer transactions — such as French lensmaker Essilor International’s purchase of Luxottica Group, the producer of Ray-Ban sunglasses — are leading the increase, reflecting growing optimism that job creation will boost household demand.
“Confidence is rising,” says Marco Settembri, head of Nestle’s European business. “People are more confident to spend.”
Politics could still get in the way. Italians will vote to choose their parliament next year, with the eurosceptic Five Star Movement set to make a strong showing. Merkel may have won the German election, but her party still had its lowest share of the vote since 1949 as the far-right Alternative for Germany made gains.
That might throw a spanner in the works for Macron’s vision for overhauling the world’s largest trading bloc, where Germany’s cooperation would be essential.
The brighter outlook has also helped to push up the euro, which has risen almost 12 per cent against the US dollar this year and nearly 6 per cent on a trade-weighted basis.
That’s worrying for the ECB because it depresses import prices and so curbs inflation, complicating its discussion on whether to start paring back its asset-purchase programme. It also makes exports less competitive.
HSBC estimates that for every 10 per cent jump in the trade-weighted euro, exports fall by 5 per cent.
Bloomberg Intelligence predicts the expansion will slow slightly in the third quarter and decelerate further into the end of the year as the economy approaches its potential, according to BI economist Maxime Sbaihi. The ECB itself forecasts a slowdown to 1.8 per cent in 2018 and 1.7 per cent in 2019.
One warning sign is an unexpected decline in German business confidence for a second month in September. The region’s biggest economy also saw unemployment fall to a new record low last month — at 5.6 per cent — but even it is struggling to lift wages and inflation.
“We probably are right around the peak,” says Jack Allen, an economist at Capital Economics in London. “But that’s not to say that we don’t think that things will continue to get better. Unemployment will keep on falling, gross domestic product will also keep on rising and, at least by euro-zone standards, the economy will continue to expand at a decent rate.”
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