Brexit: Euro zone economy set for best year in a decade as UK registers worst living standards squeeze since 1815
The euro zone economy will mark its best year in a decade and maintain solid growth well into 2018, according to economists in a Reuters poll who said the risk was that their forecasts might not be optimistic enough.
Inflation, last clocked at 1.4 per cent, is expected to stay below the European Central Bank’s target of just under 2 per cent until at least the second half of 2019, according to the poll of over 80 economists taken between 13 and 16 November.
Euro zone economic growth has been surprisingly robust this year, outpacing both the United States and the UK simultaneously for the first time since the 2007-08 financial crisis, and also one of the most synchronous upturns across the euro zone economies.
The UK has slipped from being the top performing of the G7 group of wealthy countries on the eve of the Brexit vote to close to the bottom. The country is in the midst of the worst squeeze on living standards since the Napoleonic Wars.
Over 90 per cent of 40 economists who answered an extra question said they were confident the current upswing in economies across the 19-nation euro zone would last through the forecast horizon. Only four respondents said they were not.
Such a high degree of confidence in above-average performance for the euro zone has never been captured in Reuters polls stretching back since the financial crisis, and indeed has been a rarity ever since the euro was launched in 1999.
“If you look at forward-looking indicators...then you actually see that the expansion has momentum, which will continue into 2018, and so that is definitely good news - and it is broad-based,” said Peter Vanden Houte, chief euro zone economist at ING.
Sixty per cent of respondents also said the risks to their growth forecasts were skewed more to the upside, with 30 per cent saying they were balanced and only 10 per cent said it could be worse.
For inflation, a little over half said the risks to their forecasts were balanced, over 35 per cent of the economists said they were skewed more to the upside and less than 10 per cent said the risks were inflation would be even weaker.
“All stars remain aligned for the euro zone: lower fiscal drag, accommodative monetary policy, decent level for the euro, strong economic confidence,” noted Louis Harreau, economist at CA-CIB, adding that inflation would pick up next year.
“The only increasing risk for 2018 is the Italian election, but that should have a limited impact on economic confidence.”
The results suggest forecasters appear unfazed by political risks to the euro zone economy, including the negotiations with Britain on its exit from the European Union, set for 2019. The UK economic outlook is looking much less positive.
A Reuters poll last month said the most likely eventual outcome of those negotiations would be an EU-UK free trade agreement. But the chances of a disorderly Brexit - where no deal is agreed - crept up to 30 per cent.
The solid outlook for euro zone growth supports the European Central Bank’s decision last month to begin reducing its quantitative easing program by half to €30bn per month from January, with purchases through September 2018.
But the ECB left the door open for an extension to the monthly asset purchases beyond September next year, in its fight to bring inflation back to its target.
That has kept a lid on expectations for further appreciation in the euro - already up over 11 per cent in 2017 against the dollar - over the coming year, according to a Reuters poll of foreign exchange strategists earlier this month.
The latest poll showed the ECB is expected to hold its refinancing rate at zero and deposit rate at -0.4 per cent through the end of next year.
Expansion has picked up speed in the euro zone this year, with the economy growing 0.6 per cent in the third quarter on a quarterly basis.
It was expected to grow 0.5 per cent in the current quarter through to the end of next year and then at 0.4 per cent quarterly in each quarter after that for the first half of 2019.
Annual growth was forecast to average 2.2 this year, 1.9 percent in 2018 and 1.7 per cent in 2019, compared to 2.2 per cent, 1.8 per cent and 1.6 per cent respectively in the previous poll.
While the ECB has already spent over 2 trillion euros buying mainly government bonds since March 2015 in an effort to bring inflation back up to target, price pressures still remain weak.
Inflation is forecast to average 1.5 per cent this year, 1.4 per cent next year and 1.6 per cent in 2019, similar to predictions made in an October poll.