Eurozone: 2018 will be off to a good start - ING

Leading indicators for the Eurozone point to continued robust growth in the New Year and recent strength in the labour market will fuel household consumption at the beginning of 2018 too, according to analysts at ING.

Key Quotes

“Credit standards have eased over recent years, although the past quarters have seen some stabilisation. Nevertheless, bank lending growth is slowly increasing, fueling further investment and providing a tail-wind to the housing market recovery. Despite a somewhat stronger euro than at the start of 2017, exports are likely to continue to be supported by the global recovery as the Eurozone’s main export partners are, on average, expected to experience somewhat faster growth over 2018.”

“But that’s not all. There are indicators that are even pointing to accelerating growth in the months ahead. Could it be that the Eurozone economy shifts into even higher gear?”

“1. New orders are pointing towards an acceleration in the economy. Order books have improved to levels previously seen at the top of the business cycle, suggesting an accelerating recovery of Eurozone industry. Industrial output had lagged the overall economy but is closing the gap with an annual growth rate of 3.3% in September. The recent surge in new orders could be a prelude an acceleration in Eurozone GDP growth.”

“2. With demand continuing to improve in the Eurozone, many businesses are now indicating they are reaching the limits of their production capacity. That requires expansion and causes corporate investment to increase. Given the current levels of capacity utilisation, it could well be that annual non-financial corporate investment growth increases to above 5%.”

“3. Businesses are not just reaching capacity in terms of capital; employment is increasing as new orders continue to grow and backlogs of work increase. Survey questions indicate that the labour market is roaring. The Eurozone PMI for November indicated that hiring is now at a 17 year high, while the European Commission shows that business expectations of employment are at the highest since the start of the indicator in 1985. As businesses are also reporting higher vacancy rates, there may even be an upside to wage growth in the year ahead. Improved employment boosts average personal disposable income and is closely connected to consumption.”

“4. Related to the previous point, consumer confidence has reached the highest level since January 2001. In fact, outside of a few months in 2000 and January 2001, consumers have never been more confident. Even in the roaring nineties or around the fall of the Berlin Wall Eurozone consumers weren’t this positive. This is mainly because their outlook for employment and personal finances is very good, which boosts their plans for consumption. The surge in expectations to buy durable goods could push annual consumption growth to around 2.5% YoY early next year.”

“5. We could even expect some government support next year. The effects of austerity measures are fading at the moment, causing government expenditure to improve. This year we expect the fiscal stance, the impact of government spending on economic growth, to be 0.2%, up from 0.1% in 2016. For next year, there is even more room for improvement as the French fiscal stance is likely to improve significantly.”