Economics

TalkingEconomics: European forecast update - from strength to strength

The eurozone continues to outperform expectations, although UK growth has slowed as expected.

02/06/2017

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

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The outlook for the eurozone is bright. We have revised up the growth forecast from 1.5% in 2017 to 1.8%, taking our forecast above the consensus (1.7%). The inflation forecast has not been changed for 2017 (1.6%).

As a result, we have not changed our central bank policy forecast. We expect the authorities to taper monthly purchases again in January 2018 (to €40 billion per month) and in Q3 and Q4 of 2018 to land up at €10 billion per month by end-2018. This should pave the way for interest rates to rise in early 2019.

Political risk update

We view Macron’s victory in the French presidential election as positive from a risk and macroeconomic perspective. Elsewhere though, investors have reacted negatively to the prospects of an early election in Italy, but that is probably because of the risk of a government led by the Five Star Movement. We suspect that when a firm date for the election is agreed, Italian equities and bonds will continue to underperform.

UK finally runs out of steam

The UK economy has finally suffered the slowdown most economists had been expecting. As a result, we have revised our forecast downwards from 1.8% to 1.7% for 2017. We expect to see an improvement in the second half of the year though as inflation peaks. The forecast for 2018 has been left unchanged.

On the inflation front, our expectations are for a rise from 0.7% in 2016 to 2.8% in 2017, before falling back to 2.2% in 2018. The Bank of England is likely to keep policy unchanged, with risks skewed towards further easing.

Election update: from coronation to contest?

It appears that there is a genuine contest now for number 10 Downing Street, rather than a "coronation" for Mrs. May. Opinion polls still show that May is favourite to win. She has strongest support from those aged 50+, which is a large segment of the population, and more importantly, much more likely to vote.

Labour enjoys strong support amongst younger age groups, but the low turnout is a major handicap. However, if Labour can maintain its current momentum, and can persuade younger voters to show up, then a Labour win is certainly a possibility.