Eurozone GDP growth the most in a decade

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Eurozone GDP growth

The Eurozone economy was seen closing the year 2017 on a firm footing as it outpaced U.S. growth for the second time. Data from the European statistics agency, Eurostat, showed that the Eurozone’s growth was the strongest in a decade, supported by an uptick in the investment spending from French businesses.

Data released last week showed that the 19-member Eurozone countries saw the Eurozone GDP growth at a pace of 2.5% in 2017, compared to a year ago. The pace of gains in the economic growth was the fastest since 2007.

The uptick in the Eurozone GDP growth was evidenced by the fact that global growth had also peaked and includes other countries such as the U.S. and China, which have seen better than expected GDP numbers last year.

The recovery in the economy was underlined by the confidence from the European Central Bank, which has moved towards a policy normalization mode. Various business surveys showed that the Eurozone’s economy also started on a stronger note in 2018. However, various obstacles still remain as the ECB is contemplating its exit from the QE program.

 

Eurozone GDP: 2.7%, December 2017. Source: Tradingeconomics.com
Eurozone GDP: 2.7%, December 2017. Source: Tradingeconomics.com

 

Regional data released last week showed an overall pickup as well. The French economy was seen expanding at a pace of 1.9% marking a strongest increase since 2011. Most of the credit was attributed to the French President, Macron, who is linked to cutting the red tape and taxes which have long been blamed as obstacles for growth in the country.

Other data also supported this view, with non-financial investment seen rising 4.3% on the year in 2017 which marked the biggest increase in a decade.

The French President was seen confident as earlier in the week, Macron announced that France is back as he made the case for business leaders and heads of state to overhaul the global trade rules.

The French government has planned further economic overhauls this year as it hopes that the policies will remove barriers for growth especially the smaller firms in France.

Despite the optimism, the Eurozone economies will have to deal with a higher exchange rate and the potential for trade changes as the U.S. government aims to narrow the trade deficit.

While the French story has remained in the headlines, the growth numbers posted managed to offset a slowdown from Spain. Data showed that Spanish GDP rose just 3.1% in 2017 compared to 3.3% in 2016. Spain is Eurozone’s fourth largest economy, trailing Germany, France and Italy.

While the economic data has remained positive, longer term factors are expected to slow GDP growth. For one, fundamental and political risks still remain. The Italian elections which are due in March could pose some threat to the Eurozone once again. However, the risks are considered to be smaller compared to the French elections.

 

Despite optimism, significant risks to growth remain

The Eurozone economy is also expected to battle the problem of aging population. It is estimated that nearly a fifth of the Eurozone’s young population are still jobless. Data from the IMF released last week showed that this was bad not just for the economy but also the political health as well.

The fact that the financial integration is yet to make significant inroads further complicates the outlook.

Still, lawmakers remain hopeful. The Dutch finance minster, Hoekstra said in an interview with the Wall Street Journal that Europe was doing economically well. He said that while there was a feeling of having a rough ride, the “sun was up again.”

Trade data also remains another big obstacle for the Eurozone which runs a higher trade surplus. Most of the surplus comes from higher exports that helped to push growth. The eurozone’s trade surplus was seen rising to 386.1 billion euros for the 12 months ending November.

The trade surplus in the Eurozone has often seen the U.S. President Trump pointing fingers at the Eurozone for keeping its exchange rate artificially low in order to gain an advantage in the global markets. The threat of the U.S. imposing trade restrictions on the Eurozone exports could potentially hit at the overall growth.

For the moment however, the strong fundamentals have reflected with the euro currency’s exchange rate rising. The recent ECB meeting saw little to no reference to the exchange rate’s appreciation which showed that the central bank was comfortable with a higher exchange rate.

 

 

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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