Eurozone’s growth outperformance has been key for EUR - Westpac

Eurozone’s growth outperformance, especially in Germany, has been key for EUR through 2017, according to Tim Riddell, Research Analyst at Westpac.

Key Quotes

“Although surveys and activity data suggest that growth will remain solid in Q4 17 and into Q1 18, the expectation components of ZEW surveys have failed to punch higher since mid-2017 and are now moderating. This may well be a sign that growth is likely to moderate (from Q3 17’s 2.6%) rather than continue to beat expectations.” 

“Eurozone growth has brought down headline unemployment (to 8.8%), but it remains well above its 2007 low (7.3%). Youth skewed underemployment has only retraced 50% of the rise seen since its 2007 low. Consequently, the effective slack in the economy remains and so both wage growth and core inflation have failed to gain any uptrend.” 

“Merkel’s CDU/CSU is struggling to form an effective coalition and may be reduced in effectiveness once any agreement is found. Italy is now going to the polls on 4th March under new electoral rules which are likely to lead to a broad coalition. This suggests that national structural reforms are unlikely, let alone Macron’s goals for EU-wide reform.”

“This backdrop should affirm ECB’s policy stance unless there is a surprise wage/inflation shock. Consequently, EUR is likely to struggle within its 2017 ranges. Similarly, the lack of Swiss inflation should keep SNB on hold and CHF range bound.”