Eurozone: Growth continues apace - HSBC

Simon Wells, Chief European Economist at HSBC, explains that once again, the short-term Eurozone momentum has surprised to the upside, driven by a potent cocktail of reduced political risk, an improving labour market and a decent global tailwind.

Key Quotes

“Annual GDP growth has edged up further and the PMIs remain solid. This strength in leading indicators, alongside back data revisions, means we revise up our 2017 eurozone GDP growth forecast sharply from 1.9% to 2.2%. By expenditure, this mainly reflects stronger household spending and weaker import growth (we have actually revised down investment due to revisions to back data). Given stronger momentum, we raise 2018 growth by 0.2pp to 1.8%, but this still implies a slowdown from 2017 as the stronger currency drags on export growth.” 

“We then expect growth to moderate again in 2019, to 1.6%. This reflects Germany and Italy returning gradually to their long-term trend and a more pronounced slowdown in Spain. For Italy, weak real wage growth should continue to weigh on consumer spending, against a backdrop of political uncertainty and weak credit growth. In Spain, a slight moderation in growth might even be welcome to avoid a possible return of external imbalances in the economy, as the current account surplus is already being eroded fairly rapidly. France bucks this trend with growth rising in 2019, as we give the French government the benefit of the doubt and assume some positive impact of labour market reforms.” 

“We assume productivity growth remains around its current positive, if unspectacular, rates (around 0.2% q-o-q). This combination should mean the unemployment rate (at 9.1% in July) falls steadily to average around 8.4% next year (back to 2000-08 average) and 8.1% in 2019.”

“But despite the continuing erosion of labour market slack, we see little scope for wage growth to rise. Falling inflation, sluggish productivity growth and continued long-term headwinds to labour's bargaining power (such as technological advances and the “gig economy”), mean we think the ECB is still overly optimistic on wages.”

“In turn, we forecast inflation to be slightly softer than policymakers are expecting. The impact of the stronger euro means headline inflation should hover around 1.1-1.2% for much of 2018, and pick up only gradually in 2019 to average 1.4% (0.1pp below the ECB's forecast).”