Brussels warns on volatility risk to booming eurozone

by | February 7, 2018 5:01 pm

Brussels warned that market volatility posed a threat to the eurozone’s booming economy, as it unveiled forecasts showing the currency bloc was growing at its fastest pace for a decade.

The European Commission on Wednesday estimated that the eurozone economy grew 2.4 per cent in 2017, exceeding expectations by 0.2 percentage points.

The commission also revised its growth predictions for 2018 and 2019 upwards compared with previous forecasts from November. It said it expected the bloc to grow 2.3 per cent this year and 2 per cent in 2019, with Germany, France and Spain all putting in strong performances.

“Europe’s economy has entered 2018 in robust health” and was “enjoying growth rates not seen since before the financial crisis”, said Pierre Moscovici, EU economy commissioner.

But Brussels also warned that downside risks “have also become more pronounced”.

The forecasts, prepared ahead of big global stock market swings this week, warn of the potential for “a sharp correction in financial markets”.

The commission’s economists say that asset prices “may be vulnerable to a re-assessment of fundamentals and risks” that “could expose fragilities related to the debt overhang in a number of member states”.

Brussels also warned that “US stocks seem pricey” while “European stock markets, by contrast, appeared more moderately valued”.

The commission said euro area growth could be checked by “supply side constraints” such as shortages of skilled labour hitting the economy earlier than expected. Brexit and geopolitical tensions over North Korea are other sources of uncertainty.

In its individual country forecasts, the commission said it expected Germany to experience continued robust growth of 2.3 per cent this year — up 0.2 percentage points compared with the previous prediction — and 2.1 per cent in 2019.

Brussels said France would achieve growth this year of 2 per cent for the first time since 2011. It also expected Spain’s economy to expand by 2.6 per cent in 2018.

But it adds that while the effects of the Catalan crisis on the Spanish economy had “remained contained” so far, “future developments could still have an impact, the size of which cannot be anticipated at this stage”.

Italy continues to lag behind the euro area as a whole, with predicted growth of 1.5 per cent in 2018 — the slowest of the eurozone’s top five economies.

Brussels thinks the British economy will grow 1.4 per cent this year, a slight upgrade from the 1.3 per cent forecast in November, but less than the growth of 1.8 per cent estimated for 2017. Growth will slow further to 1.1 per cent in 2019.

The UK’s outlook “remains relatively subdued”, mainly because of a slowdown in private consumption, added the commission.

Forecasts for the UK were calculated on the basis of a “technical assumption” that there will be no change in Britain’s trading relationship with the EU until the end of the forecast period in 2019. Although the UK is set to leave the bloc in March next year, Theresa May’s government is seeking a standstill transition for about two further years.

The commission’s economists noted the gradually diverging paths being taken by the European Central Bank — which is still providing an “ample degree” of stimulus to the eurozone, including through €30bn of asset purchases a month — and the US Federal Reserve which has begun to raise interest rates steadily.

Although both central banks have assured investors that shifts in policy would be “prudent” and “gradual”, the report warned buoyant US stock valuations could be vulnerable because of an ageing world population and lower long-term growth.

The commission added European stocks were less at risk of a sudden re-pricing as they were still “moderately valued”. European sovereign bond yields were also “very low”.

It predicted that core inflation would “remain subdued” in the euro area over the period to 2019, as “labour market slack recedes only slowly and wage pressures remain contained”.