Latest business surveys point to a strong growth momentum for the euro area recovery, closer to 3%. Indeed, following an estimated +2.3% GDP growth in 2017, AXA IM expect it to grow at +2.7% in 2018 (Figure 1). Although global trade has been picking up and benefiting to the euro area, domestic factors will remain the main driver of growth, with solid private consumption and resilient investments. Recent flow of data (retail sales, car registrations etc.) as well as surveys point towards strong consumption in the near- term. Also, consumption will benefit from rising purchasing power thanks to job creation and (modest) wage acceleration whilst inflation remains almost stable, and also further reduction in precautionary savings.
While, in the early phase of the euro area recovery investment remained muted, it has recently started to play a much larger part. Although investments are not growing at a very fast pace, they have been growing robustly and consistently. The machinery and equipment sector is picking up, the capital goods sector is experiencing stronger demand according to business surveys and although volatile, business investment is growing mostly thanks to non-construction.
As most countries are aiming at reducing debt-to-GDP ratios, fiscal policy should not be a support for growth. However, it should be neither be a drag on activity as many countries plan to reduce that metric thanks to the cyclical tailwind. Therefore, AXA IM’s experts comment that:
Altogether, we expect headline growth for 2018 to be strong, we foresee a mild slowdown in the euro area from the second half of 2018 as financing conditions will progressively tighten and provide softer tailwind for the economy.
Corporates say risks are on the upside
Surveys indicators are at a 10-year high in the euro area. PMI have been consistently on the strong side throughout 2017. Consumers and corporates across sectors and countries are very confident.
On top of this, analysts notice that shortage of labour is reported as “historically high” among euro area industrial companies.
This could lead to a better than expected rise in employment and output in 2018. Our survey based GDP model points to an annual growth close to +2.9% which much larger than our baseline estimate and well above consensus forecasts.
No such thing as an overcrowded macro view
Most if not all macroeconomic forecasters and international organisations are expecting solid GDP growth in the EMU in 2018. The median forecast from 68 professionals as of December 2017 is 2.1% with a range of 1.6% to 2.9%. We see very little dispersion among forecasts – 0.2 mean absolute deviation for 2018 forecasts among 68.