Euro area economy defies political risks

• Businesses started the year with vigour
• KfW Research lifts growth forecast for the euro area to 1.6% for 2017, expects similar growth in 2018
• Political risks are only a minor burden on the economy so far but make it hard for businesses to take off

Businesses in the euro area started the year with great vigour. Industrial output is higher and order books are fuller than they have been since 2008, while capacity utilisation is above its long-term average and current senti¬ment indicators indicate a six-year high. KfW Research therefore expects a successful first quarter for the euro area economy (+0.6% on the previous quarter) and lifts its forecast for 2017 slightly to 1.6% (previous forecast +1.5%). The economy should continue to grow at the same pace next year. KfW Research expects GDP growth of 1.6% in the euro area in 2018 as well.

Businesses and financial markets responded with moderation to the political events that took place in Europe and the USA in the past months, even if the resulting increased uncertainty has held back investment. This year will also be marked by political headlines. With the tone set for fiery Brexit negotia-tions, uncertainty over U.S. trade policy and elections scheduled in the Netherlands, France, Germany and – by spring 2018 at the latest – in Italy, businesses will likely remain in wait-and-see mode for a while.

“The euro area is now in its fourth consecutive year of recovery. But political uncertainties prevent the economy from really taking off. In the current environment, businesses will continue to put the brakes on investments”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “What is now crucial is for Europe to develop a sustainable scenario for the future and strengthen people’s confidence in the euro area’s political stability. The European Commission’s White Paper has now put options on the table for the European Union’s further development. For the euro area at least, the path towards closer cooperation and growing convergence continues to be indispensable for the economy and the right political choice.”

KfW Business Cycle Compass Euro Area