QUARTERLY INVESTMENT STRATEGY: EUROPE OUTLOOK
“More of the same” is also the likely path forward for Europe, whose recovery is much more recent than that of the US. We expect Eurozone real GDP to expand around 1.5% in 2016, surpassing its potential growth rate for a second year.
IN A NUTSHELL
- At around 1.5%, Eurozone growth should remain above its potential in 2016 thanks notably to improving bank lending, durably accommodative monetary policy and a supportive consumer environment.
- The main risks for Europe are political rather than economic: the UK, France and Germany all face crucial votes in 2017.
- Swiss perspectives look relatively downbeat, with negative rates hurting lending activity.
Relative to recent history and investor expectations, the Eurozone is clearly on the strong side, thanks to a notable improvement in bank lending, an accommodative monetary policy through at least 2017 and a supportive environment for the consumer. Both core and peripheral economies have also improved their fiscal positions over the past three years – meaning that fiscal authorities may tolerate increased spending. The European Commission has even stated that it is willing to allow for temporary deviations from the Stability and Growth Pact’s budget rules under unusual circumstances.
While low productive investment, a lack of structural reforms and high unemployment continue to be headwinds, the primary risks facing Europe are political not economic. The electoral calendar is fairly light for next year but will heat up in 2017 with three major deadlines: the European Union membership referendum in the UK, the French presidential election in April 2017, followed by parliamentary elections in June 2017, and the German Bundestag elections in the fall. All three stand to be very tight races, likely to cause market gyrations.
In the UK, polls are currently split. In France, even though the probability of a Front National victory is low, markets will need to adjust for the possibility of a populist government – whose program explicitly calls for the breakup of the Eurozone. Last, Germany chancellor Angela Merkel’s personal approval rating is still stellar but her decisions on the migrant crisis have cost her a lot of political capital.
To illustrate our 2016 Eurozone outlook, two points are to be noted. First, M1 is improving sharply, meaning that the liquidity created through quantitative easing is now actually finding its way through to the real economy. Second, M1 is a relatively good leading indicator for industrial production, implying that the dynamic on that front should also remain positive. Additionally, improving retail sales are an indicator of the consumption recovery that we are counting on for the Eurozone in 2016.
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