Research Team at RBS, suggests that the Eurozone economies appear to have weathered the Brexit storm pretty well so far and certainly better than they had expected.
“Credit market conditions have loosened in recent weeks at the same time as periphery bond spreads have tightened. And some of the forward-looking regional economic data has held up reasonably well. An improvement in sentiment toward the world economy, partly driven by a string of stronger than expected US data points, has also helped matters.
Notwithstanding this, we remain guarded about the outlook for the Eurozone in the coming months. There are a number of reasons:
- The first concerns the outlook for global growth, which remains weak and with risks that are skewed to the downside. Indicators of policy uncertainty, illustrated in the charts on page 5, are at extremely high levels in many major economies and not just in the UK. Forward looking barometers of global growth in the meantime remain stuck at levels that imply very subdued economic activity in the period ahead.
- A second reason for caution concerns the Eurozone dataflow. While some of the forward looking survey data has been pretty respectable in recent weeks this is not a universal story. Some of the incoming data has certainly outperformed expectations but from base levels that were pretty weak. The incoming data for retail sales and industrial production growth in the meantime has been quite soft.
- Thirdly and from more of a medium-term perspective the imbalances that have bedevilled the Eurozone region in recent years show no signs of abating and in some cases appear to be getting worse. The recent weakness in banks’ equity prices is arguably a symptom of these lingering imbalances and one that could further restrain bank lending growth in the weeks ahead.
- A final reason concerns political stability and the recent evidence from the European Commission that suggests many populations – and not just the UK’s – have become more hostile toward the EU in recent weeks. That evidence was admittedly gathered before the UK’s Brexit vote. But it nevertheless underscores the role that politics could play in affecting economic developments not least ahead of some important political events in Italy, the Netherlands. France and Germany over the next 12 months.
On balance we expect the Eurozone’s recent recovery to continue to slow in the months ahead and at the very least disappoint the ECB’s forecasts. We are specifically forecasting GDP growth of 1.5% this year and just 1.0% in 2017. These contrast with the ECB’s GDP forecasts of 1.6% and 1.7% respectively.”
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