Europe significantly outperformed expectations over the course of 2017 – both economically and politically – and we believe that this trend is likely to remain in place next year.

Like most macroeconomic data released during the past months, the 3rd quarter GDP report exceeded expectations, showing an annualized growth rate of 2.6% as of the latest revision. With most forward-looking indicators pointing to unabated strength, and still considerable slack in the economy, we look for Eurozone growth to again be meaningfully above 2% in 2018. Our above-consensus forecast is driven by a number of factors, including continued labour market improvements, solid corporate profitability dynamics, an increasingly firm investment outlook, a healthier global economy, and significant policy support for the recovery.

The fact that the European Central Bank (ECB) has committed to pursuing quantitative easing (QE) until September and keeping the deposit rate negative until after the end of its asset purchases will provide continued support to the economy. This is in stark contrast to what usually happens in periods of growth acceleration, which tends to push monetary policy into tightening mode. The renewed ECB commitment has ensured extraordinary policy support for most of next year, but we note that the debate about the timing is intensifying in the Governing Council, and late 2018 is likely to be a turning point (see charts V and VI).

Finally, while there is obviously some latent political risk, it is nothing like the heavy agenda that Europe was facing at the start of 2017. Euroscepticism failed to score any significant victories – if anything, Brexit appears to have actually increased the support for Europe. We see limited risks from next year’s elections in Italy. We think Catalonia is likely to remain a fairly contained issue. And looking at Germany, after ups and downs in coalition talks, it has recently started to look increasingly likely that Merkel will manage to form another grand coalition thanks to a softening of the Social Democratic Party’s position.