Euro area growth modest, political risk rising - ANZ

Brian Martin, Head of Global Economics at ANZ, suggests that whilst domestic demand growth has been propping up the euro area recovery, growth is very uneven.

Key Quotes

“As Europe enters an intense election cycle next year with unemployment high, income growth negligible, and opposition to deeper EU integration rife, the backdrop favours the USD for the time being. Italy, which has a referendum on constitutional reform on 4 December, is a clear case in point. Almost ten years following the onset of the GFC, Italian GDP has failed to recover to its previous peak. Unemployment remains stubbornly high at 11.4%, house prices are still falling (Q2 -1.7% y/y), and NPLs in the banking system are estimated to be around 20% of GDP.

There are elections planned in the Netherlands, France, and Germany, and if Italian PM Renzi fails in the 4 December referendum – which opinion polls suggest he will – there may be an election in Italy. The question of European integration given economic underperformance, immigration, Brexit, etc., all suggest some political risk premium for the euro and an overreliance on easy monetary policy for growth.

A lower EUR/USD looks probable – as does EUR underperformance against higher yielding APAC currencies. Whilst forecasting direction in EUR/USD has been frustrating and fraught with many potholes over the past twelve months, the balance of fundamental risks seem to be stacking up in favour of USD strength in the coming months.”