2017: Consensus too bearish on Euro Area growth

Consensus said:

Consensus forecast euro area growth of 1.4% in 2017. 

We said:

Expect upward revision to consensus growth forecasts; 2017 growth could be 2%.

In focusing on the string of looming elections, investors may be missing the EA’s relatively healthy underlying economic momentum. Growth expectations for 2016 were revised up and have also been ratcheted higher for this year. There may be room for more upgrades. Low real FX rate is helping exports. Private consumption has been one of the main engines of growth as the collapse in oil prices last winter boosted real incomes in spite of lacklustre nominal wage increases. The fear has been that the recovery might peter out once the benefits of cheaper oil wanes. But, there are signs that the expansion is gradually broadening out to capex and we expect more improvement in business spending.

A still competitive currency and global manufacturing reflation bode well for the pricing power of euro zone producers. Businesses have strengthened their balance sheets, suggesting they are better placed to invest and create jobs. The ECB’s policies have buoyed capital markets and compressed lending spreads for larger corporates as well as for small firms in the periphery. Monetary conditions have improved and bank credit has picked up. The ECB’s bank lending survey forecasts improving credit demand and supply conditions. The worst of private sector deleveraging is likely behind us and fiscal policy has turned expansionary at the margin. The European Commission survey shows a healthy rise in industry’s employment expectations.

The European recovery still has legs. Seize the opportunity before it fizzles out.

Outcome:

The euro area enjoyed its fastest growth patch for many year with GDP growing 2.4% in 2017. 

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