Upswing in the euro area continues
Press Release from 2018-03-07 / Group, KfW Research
- KfW Research confirms growth forecast of 2.4% for 2018
- Growth expected to slow to 2.1% in 2019
- Political risks to the euro area business cycle have waned, spotlight is now on financial markets
With a growth rate of 2.3%, 2017 was the most successful year of the euro area in a decade. The upswing will continue at an unabated pace in 2018 as well. KfW Research confirms its 2.4% growth forecast for the current year. The current business cycle might have passed its peak in 2019, however, and the growth momentum may slow moderately. KfW Research expects real gross domestic product to grow by 2.1% in 2019.
Consumption remains the main driver of the upswing, fuelled by the steady reduction in unemployment in the euro area. Investments are gaining in importance as a second pillar, not least because full capacity utilisation is now approaching in the wake of what has been a long-standing economic recovery and companies must invest to meet demand. Unlike in the past four years, external trade has recently contributed to growth again as well. International orders from outside the euro area in particular increased significantly in the second half-year of 2017. This shows that international business so far has not been impaired by the appreciation of the euro.
“The current economic situation in the euro area remains good, with hard cyclical indicators signalling strong growth in 2018 as well”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “Recent confidence indexes, however, have shown first clouds appearing on the economic horizon. Several factors point to slower momentum in 2019. The euro area will mark six years of continuous recovery early next year. The mere duration of this recovery phase makes it plausible to assume that growth has now reached the peak of the current cycle. This is all the more so as the economy is now growing faster than its potential rate and the stimulus from the expansionary monetary policy will decrease. The financing environment is becoming less favourable – even if the decline is starting from a high level. Nevertheless, the interest rate reversal has now been initiated and the distortions in the stock markets at the beginning of February confirm the heightened risk aversion among market stakeholders. Moreover, although the global economy is still growing strongly, growth momentum is not accelerating further outside the euro area either”, said Zeuner.
The risk of lower economic development exists particularly if interest rates rise faster than previously expected, leading to heightened volatility in the financial markets. “A sudden tightening of borrowing conditions might hamper investment activity and shake this increasingly important pillar of the recovery”, said Zeuner. Political risks also remain but have partly shifted away to countries outside the monetary union. Besides the scenario of a hard Brexit that still cannot be ruled out, the main focus here is on a US trade policy that may be harmful to growth and set in motion a protectionist spiral. In addition, should the euro continue to appreciate strongly it will be increasingly difficult for the economy to defy the associated negative consequences for exports and maintain a constant growth rate.