Yves Nosbusch 




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European growth has surprised on the upside in 2017

The economic performance of the eurozone has undoubtedly been one of the positive surprises of 2017. The fears and uncertainties that overshadowed the European economy at the start of the year have given way to confidence and optimism in the last few months. Unemployment has continued to decline, falling below 9% in September, and the economic sentiment indicator for the eurozone is now at its highest level since 2001. Growth is increasingly synchronised, both across countries and between different economic sectors. In addition, for several months now this growth has no longer depended solely on domestic demand. While the latter is still robust, exports have also been growing strongly, and this has been the case in spite of the appreciation of the euro. All in all, the eurozone's economy should grow by around 2.3% in 2017. This represents a sharp acceleration compared with previous years and it puts it on a level with US growth this year.



Leading indicators also remain particularly strong. For instance, surveys of purchasing managers at the firm level have again surprised to the upside recently. In November, the Purchasing Managers' Index (PMI) reached its highest level since 2011, which suggests that growth could accelerate further in the short term. The growth rate could be around 2.5% for the full year 2018. At this pace, unemployment should continue to fall and the output gap, which measures the shortfall in production accumulated since the crisis, should close soon. Capacity utilisation rates are already high in many companies. This suggests strong investment growth going forward, which should be further supported by favourable financing conditions. It is important to keep in mind that the investment shortfall accumulated since the crisis in Europe is still significant.



The fall in unemployment should gradually put upward pressure on wages. It is also continuing to boost domestic demand, which should prompt companies to gradually raise their prices. These trends suggest a gradual rise in inflation. However, at this stage, core inflation is still close to 1% and it remains far from the European Central Bank's (ECB) target, which is to achieve an inflation rate close to (but below) 2% in the medium term. The ECB is therefore maintaining its monetary support to the economy; it has committed to additional net asset purchases until September 2018, and its forward guidance suggests that it is not likely to raise its policy rates before 2019. This means that monetary policy will continue to provide significant support in 2018. The ECB seems decided not to jeopardise the positive growth dynamic by tightening monetary conditions too quickly.



Yves Nosbusch

Chief Economist

BGL BNP Paribas


Published on paperjam.lu on 30 November 2017