Euro area confidence is booming, according to sentiment indicators. To BoAML analysts, “this remained curious, because the continued improvement does not quite match activity data that signals strong, but non-accelerating growth into year-end”.
After decomposing sentiment in a common factor across Euro area member countries, and in country-specific factors, they find that recent improvement comes from the common factor – and that is mainly down to external growth optimism.
Idiosyncratic factors behind sentiment improvements were the story of 2013-2015. This supports our qualitative story on growth: domestic demand in the Euro area is strong, but probably peaked earlier this year as some tailwinds started to fade. Maintaining the current momentum of close to 2.5%, or even acceleration from here, would require strong support from the rest of the world.
It’s all German to me (and a bit Italian, too)
Ahead of next week’s national Q3 GDP growth releases, BoAML flag upside risks to their growth forecasts.
German export growth looks better than expected in 3Q, and signals from surveys (notably the Chinese PMI) would suggest similarly strong momentum can be maintained in 4Q. Decent growth numbers mask an unusual degree of uncertainty in German politics. Soon six weeks after the September elections, coalition talks still haven’t made much progress. That makes meaningful change to fiscal policy unlikely next year. But maybe that’s the goal, because reaching debt-to-GDP ratios below 60% may be within reach by 2019.
UK budget – can I have some more?
The 22 November UK budget will, experts at the house expect, lay bare that room for policy easing is limited. The independent budget forecaster, the Office for Budget Responsibility (OBR), indicated they will cut forecast productivity growth ‘significantly’. The IFS (Institute for Fiscal Studies) worst case scenario has 2017-2021 borrowing up a cumulative £120bn.
We take a more moderate scenario for our central case (as the IFS do), giving a cumulative borrowing increase of c. £46bn. In the short term the news on borrowing should be positive, reflecting recent resilient tax revenues. In the medium term productivity misery dominates. In our view, the risks are skewed to more fiscal worsening in future budgets.