Euro Economy Is Heading Towards a Golden Period

European Stock Markets

The 19-nation euro-zone bloc is already enjoying the strongest growth in a decade and now economists at Credit Suisse Group AG and Oxford Economics are declaring that it’s heading toward a golden period of low-inflationary expansion.

The turnaround is striking for a region that plunged from the global financial crisis into its own sovereign debt turmoil, record unemployment and near-deflation that threatened the very survival of the currency union. While still to make up most of the ground lost in the dark years, and with productivity still weak, the upturn at least holds out the hope that some scars will start to heal.

The improvement has plenty of room to run, says Angel Talavera, an economist at Oxford Economics in London. The European Commission last week raised its 2017 growth forecast to 2.2 percent from a 1.7 percent estimate in May.

In a report on Monday, the International Monetary Fund said growth across the European region -- which includes the euro area as well as developing economies in central and eastern Europe -- is having a positive spillover effect on the rest of the world. It also said those brighter prospects accounted for the bulk of the upward revision to its global outlook in October.
 

European Central Bank policy maker Benoit Coeure last week went as far as to say that in terms of balance and robustness, the economy is in the best shape since the euro’s birth in 1999 although he called on governments to implement more reforms to support it.Support for the single currency -- although on the rise -- has yet to reach its 2007 high and euroskeptic political parties have gained ground. The anti-euro AfD party became the third largest in the German lower house after elections in September. The populist Five Star Movement in Italy is strengthening before next year’s general election.

 

To insulate the economy, the ECB announced in October that it will continue to buy public and private-sector debt for most of next year and won’t raise interest rates for a long time thereafter, guaranteeing an expansionary monetary policy.
With few signs yet of accelerating price growth, Nordea Bank said last Wednesday that it doesn’t expect any rate increases until December 2019, after Draghi has finished his term.

Capacity utilization is close to historic cyclical highs, which bodes well for investment and jobs. Rising employment in turn should bolster private consumption, while exports are set to benefit from robust global trade.
 

Even fiscal policy might contribute. Germany, the region’s proponent of austerity, is looking at tax cuts for Chancellor Angela Merkel’s fourth term in office. Goldman Sachs Group Inc. economists estimate that the area-wide budget position will ease next year.
There’s good cause to think euro-area growth can gather further strength in 2018 said economists at Credit Suisse, who last week raised their forecast to show a 2.5 percent expansion next year.