EUROPEAN GROWTH OUTLOOK
European economy in the fast lane. BDI expects over two percent growth September 2017
We anticipate economic growth of over two percent in the EU and the euro area this year. The euro area is growing robustly with many countries performing better than they have for a long time. Many sentiment indicators are at record highs.
Global growth of over 3.6 percent is fuelling the European economy. Exports are increasing further, despite the slight appreciation of the euro. Consumption on the back of a livelier labour market and rising real wages are the main drivers of growth.
Expansive monetary policy plus neutral fiscal policy. Inflation is slower than expected, curbed mainly by low import prices. Interest rates are set to remain low until 2019.
Impressive increase in industrial production – expected growth of over three percent. Corporate lending is still weak and investments have only just started picking up momentum. Productivity is still making hardly any headway.
Upturn must be used for urgent reforms. Member states need to implement ambitious reforms on the labour, product and service markets to steel themselves for tougher times ahead.
Deeper euro area integration must be on track before the European Parliament elections in 2019. Steps should include a more coordinated economic policy complete with an EU finance minister, a stabilisation tool and a powerful European economic fund for crisis prevention.
European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Content European economy: A swinging start to 2017 .................................................................................................. 3 European economic engine running better and better ........................................................................................... 3 Global economy growing solidly ............................................................................................................................ 4 Growth is broadly based, encompassing many sectors and regions ..................................................................... 4
Business sector remains optimistic with industrial production increasing ................................................... 6 Buoyant economy livens up the labour market ...................................................................................................... 7 Youth unemployment still the biggest headache in Europe ................................................................................... 8 Euro appreciates on the back of good economic situation..................................................................................... 9
Inflation tailing off slightly ................................................................................................................................ 10 European Central Bank situation is not getting any easier .................................................................................. 11 Federal Reserve Bank steadily increasing key rates, Bank of England waits ...................................................... 12 Corporate lending still faltering ............................................................................................................................ 13
Conclusion and outlook .................................................................................................................................... 14 Conclusions for economic policy.......................................................................................................................... 14
Sources .............................................................................................................................................................. 15
Imprint ................................................................................................................................................................ 16
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
European economy: A swinging start to 2017 European economic engine running better and better The economic upturn in the euro area has continued this year and is still gathering strength. Economic output registered solid growth in both the first and second quarters of 2017, taking the period of uninterrupted growth in the euro area up to four years. The prospects that this upward trend will continue in the second half of the year are good. Economic growth in the euro area is broadly based, both in terms of expenditure components and the individual member countries. The dominant mood among consumers and enterprises is positive. Backed by steadily increasing employment levels, private consumption is set to remain the engine of growth, despite rising inflation rates. The optimistic outlook shared by European companies should soon translate into an increased propensity to invest. The high level of capacity utilisation is also likely to increase pressure to invest. Despite the stronger euro, exports should contribute to growth, with the buoyant world economy pointing to a further increase in export opportunities. The latest IMF outlook upwardly revised growth forecasts for the euro area and identified the region as the driver of current global growth. Relief at the election results in the Netherlands and France have clearly abated fears of political instability. However, continuing complications in the global political environment could still curb economic momentum. The UK government has still not developed a clear line of action. A further source of insecurity is the prospect of new elections in Italy.
GDP growth in the first six months of 2017 compared to first six months of 2016
6
5
4
3
2
1
0
Sources: Macrobond, Eurostat, own calculations
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
The European Commission (May 2017) expects real GDP in the European Union to grow by 1.7 percent, rising to 1.8 percent in the following year. It forecasts 1.9 percent GDP growth in the euro area for both 2017 and 2018. The European umbrella organisation BusinessEurope anticipates growth of 1.9 percent for the EU and 1.7 percent for the euro area this year (Lange and Watson, June 2017). The IMF (World Economic Outlook, July 2017) estimates 1.9 percent growth for the euro area this year and 1.7 percent next year. The OECD forecasts 1.8 percent growth for the euro area in both 2017 and 2018. The autumn forecasts are likely to be considerably more optimistic. In its latest outlook, the ECB (September 2017) anticipates 2.2 percent growth in the euro area this year and 1.8 percent next year. On account of the impressive first six months of the year and the sunny prospects ahead, the BDI also expects growth in the euro area to be as high as 2.2 percent. Growth in the EU should also reach the two-percent mark, despite weaker forecasts for the United Kingdom. For Germany we anticipate growth of 1.8 percent, with France and Italy heading for 1.5 percent. Spain looks set to crack the three-percent mark, with many other smaller countries also recording steep growth in the first six months of the year. Growth in the euro area totalled 2.1 percent in the first six months of this year, compared to the same period in 2016 and 2.2 percent for the EU. Global economy growing solidly The global economy has stabilised further. Global GDP increased substantially in the second quarter of 2017, balancing out the rather weak start to the year. Consumption is stable, upwardly mobile and set to remain one of the main growth drivers. Investment has picked up in some countries, which could signal the end of a period of weak activity on this front. Individual countries also show an overall positive economic trend. Growth in the US and Japan was particularly pronounced in the second quarter of 2017. Economic momentum in the euro area was surprisingly positive. Economic performance was also solid in China and other key emerging markets. Despite a diverse range of geopolitical and economic risks, no fundamental risks threaten the general trend of markedly positive developments, which looks set to continue in the coming months. The IMF is currently forecasting an increase in global GDP of 3.5 percent for 2017 and 3.6 percent for 2018, while also downwardly revising its forecast for the US in expectation of a less expansive fiscal policy in the months ahead. The IMF view of prospects in the euro area and China, by contrast, have become considerably brighter, boosting the expected growth rates for these regions. The OECD predictions for global economic growth match the IMF forecasts. The European Commission expects GDP to increase 3.4 percent this year and 3.6 percent the next. The BDI expects the global economy to grow by 3.6 percent, a figure we believe is still quite conservative with distinct possibilities of higher growth in the People's Republic of China, Japan and Germany balanced out by the prospect of just 2.1 percent growth in the US. Growth is broadly based, encompassing many sectors and regions The latest figures point to a clear acceleration in the pace of growth. Almost all national economies gathered momentum in the second quarter. The first quarter of the year was already strong with GDP in the euro area and the EU growing with surprising vigour, topping the previous quarter by 0.5 percent in both cases and substantially outperforming the US. The second quarter was also strong with a GDP growth of 0.6 percent in the euro area and 0.7 percent in the EU. Almost all countries registered solid growth rates. In France, GDP grew by 0.5 percent for the third consecutive quarter. The Spanish economy also expanded by a robust 0.9 percent, driven primarily by high levels of consumption. Italy recorded growth of 0.4 percent in all three last quarters. Growth in Portugal was a modest 0.3 percent in the second quarter following a strong start to the year.
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Growth in real GDP in the EU in percent
6
3.8
4
3.3 3.1
3.0 3.0 2.5
2.2 2
2.1
2.1
2.2 1.7
1.7
1.3 1.3
0.4
1.9
0.3
0 -0.5
-2
-4 -4.4
-6 I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
change over previous year quarter
change over previous quarter
change over previous year
Source: Macrobond
The strongest growth driver in the second quarter 2017 was exports, which increased by 1.1 percent over the first quarter 2017 in the euro area and one percent in the EU. Year on year, exports in the second quarter were up by 4.4 percent in the euro area and 4.2 percent in the EU. Private and state consumption expenditure remain reliable anchors of growth, growing by 0.5 percent over the previous quarter, both in the euro area and in the EU. Companies’ increasing willingness to invest is also fuelling growth. Gross fixed capital formation also displayed robust developments in the second quarter, rising by 0.9 percent over the previous quarter in the euro area, following a decrease of 0.3 percent in the first quarter. Investments in the EU increased by 1.1 percent over the previous quarter. The phase of strong across-the-board growth is likely to continue into the second half of the year, with the extremely positive sentiment indicators fanning expectations.
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Business sector remains optimistic with industrial production increasing The business climate in the euro area has further improved. In the third quarter, the ifo index climbed from 26.4 to 35.2 points, the highest level since autumn 2000. The current situation and prospects are rated more positively in Germany, France, Italy and Spain. Prospects increased most in France, although the current situation there is still not deemed satisfactory. The same applies to the current situation in Italy. Experts surveyed almost unanimously rate the business environment in Germany as good. The positive PMI figures for August 2017 – at 57.4 points, the highest measured since 2011 – are a further indicator that Europe is on a path of solid growth and points to good production levels in the third quarter.
Industrial activity in the euro area
113
40
111
30
109 20 107 10 105 0 103 -10 101 -20 99
97
-30
95
-40
Production*
Investment*
Purchasing Managers Index*
ifo Economic Climate (right axis)
*Index: Q1/2014=100 Source: Macrobond
Industrial production in the EU dropped by 0.3 percent in July 2017, a correction following particularly strong increases in the first half of the year. Year on year, industrial production in July increased by an impressive 3.1 percent. In the euro area, production in July nudged up by 0.1 percent over the previous month or 3.2 percent compared to the same month in 2016. Capital goods and durables registered particular momentum, growing by between four and six percent year on year. Energy production, in contrast, stagnated, with nondurables registering a decrease. The good sentiment indicators point towards a stable development of industrial production in the further course of the year.
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Buoyant economy livens up the labour market The European labour market is further recovering. In July 2017, the euro area registered an unemployment rate of 9.1 percent, on a par with the previous month – the lowest rate of unemployment in over eight years. In the EU, the July 2017 unemployment rate was 7.7 percent, also equivalent to the figure for June 2017. In the EU overall, 18.9 million persons were out of work, of which 14.9 million are in the euro area. Compared to June 2017, the number of unemployed dropped by 93,000 in the EU and by 73,000 in the euro area.
Unemployment rate in percent
13
27
12
26
11
25
10 24 9 23 8 22 7 21 6 20
5 4
19
3
18
EU 28
Euro area
Germany
France
Italy
Netherlands
United Kingdom
Spain (right axis)
Source: Macrobond
Although the overall trend is positive, the situation on the labour market in the individual countries of the EU is still characterised by sharp contrasts, with unemployment in many countries still considerably over the levels registered for 2009. Greece and Spain, in particular, are still registering extremely high levels of unemployment with 21.2 percent and 17.1 percent respectively (figures for June 2017). The situation is only improving very slowly there. The trend in France is not pleasing either – the rate of unemployment has been creeping up again since May. Germany, a country that has had one of the lowest unemployment for some time, was able to reduce that number still further, down to 3.7 percent. The only country with lower unemployment is the Czech Republic at 2.9 percent. For 2019, the ECB expects an unemployment rate of 8.3 percent. We are getting closer to the pre-crisis levels of below seven percent for the EU and below eight percent for the euro area, but there is still some way to go.
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Employment figures are also positive, even though they are still strongly divergent in the individual member states. According to Eurostat estimates, a total of 235.4 million persons in the EU were gainfully employed in the second quarter 2017, of which 155.6 million in the euro area. This is a record level of employment in Europe. The number of gainfully employed persons increased by 0.4 percent in the second quarter of 2017 compared to the previous quarter, both in the euro area and in the EU. The ECB has forecast employment in the euro area to increase by 1.5 percent in absolute terms in 2017 and one percent in 2018 in comparison to the previous year. The positive trend in employment over the last three years is thus set to continue. The ECB expects a steady – but somewhat less pronounced – increase in employment in the euro area in the long term. Further growth in employment will be increasingly curbed by the shortage of skilled workers. Countries with the highest employment levels are still Sweden, the Netherlands and Germany with rates of around 75 percent. Greece – at the other end of the scale – has an employment rate of just 52 percent.
Employment rates in Europe in percent
80
75
70
65
60
55
50 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 EU 28
Euro area
Germany
France
Italy
Netherlands
United Kingdom
Spain
Source: Macrobond
Youth unemployment still the biggest headache in Europe The rate of unemployment among 15 to 24-year-olds increased slightly in July 2017 compared to the previous month, going up to 19.1 percent. In the EU it remained at a steady 16.9 percent. In the EU overall, a total of 3.8 million persons under the age of 25 were unemployed, 2.7 million of which in the euro area. Germany has the lowest rate of youth unemployment in the EU at 6.5 percent, while progress here is still slow in Greece (44.4 percent), Spain (38.6 percent) and Italy (35.5 percent).
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Euro appreciates on the back of good economic situation The euro has appreciated against all major global currencies since early 2017. This reflects both the unexpectedly solid growth in the euro area and the disappointing performance of other economic regions. Expectations of a turnaround in the ECB's monetary policy are another factor that could play into the equation here. The outcome of the elections in the Netherlands and France have largely abated looming fears of larger scale erosions of the monetary union and increased confidence in the European capital market. Against the dollar, the euro has gone from trading 1.05 dollars per euro at the start of the year to the current level of one euro at just under 1.20 dollars. The tax and fiscal policy stimuli announced by President Trump have not yet materialised. Following an initial appreciation of the dollar in the second half of 2016, the trend has since reversed. Exchange rates rollercoasted up and down in the first half of the year. In the first quarter, the US dollar appreciated in real and trade-adjusted terms by 3.5 percent, before depreciating by the same amount in the second quarter. The euro experienced a reverse trend. The yen and the renminbi also appreciated substantially against the dollar.
Nominal exchange rates, respective foreign currency per euro 130 125 120 115 110 105 100 95 90 85 80
Pound Sterling Swiss Franc US Dollar Yen Renminbi Nominal effective exchange rate vis-Ă -vis twelve most important global currencies *Increase means an appreciation of the euro against the respective currency Source: Macrobond
The British pound has depreciated further. Since early 2016, the UK currency has lost around 20 percent of its value. Major factors pressing down the pound are the slowing economy, insecurities and slow progress in the EU exit negotiations. The weak pound has also exacerbated the hike in prices through so-called imported infla-
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
tion. Year-on-year monthly inflation rates for this year so far were in part well over two percent, weakening domestic consumption, while exports are benefiting disproportionately little from the low exchange rate due to the small size of the industrial sector in the United Kingdom. Difficult times are ahead here. The Swiss franc, Japanese yen and the Chinese renminbi have also all slightly dropped in value against the euro. External factors played a minor role in this development, which was largely propelled by the robust upturn and solid forward-looking indicators for the euro area. The nominal effective exchange rate of the euro against the twelve most important global currencies has risen by around eight percent since the beginning of 2017. This appreciation has had a corresponding impact on international trade relations. If this trend continues it may well reduce the persistent trade surplus of three percent in the euro area in the medium term and lead to increased domestic consumption. The strong euro has, however, kept inflation below the two percent target rate of the ECB by cheapening imports. Within the euro area, exchange rate fluctuations affect the economies of Italy and Spain to a much greater extent than those of Germany and France.
Inflation tailing off slightly After getting close to the two percent target in the first six months of 2017, the inflation rate in the euro area was back down to 1.5 percent in August. The less volatile core inflation (excluding energy, foods, alcohol and tobacco) increased slightly to 1.2 percent. These figures do not indicate a sustained move towards the goal of price stability with a medium-term price increase of slightly below two percent. At a press conference in early September, ECB president Mario Draghi thus confirmed that the ECB would maintain its current course in monetary policy. In its most recent outlook, the ECB (2017) downwardly revised its inflation expectations to 1.5 percent in 2017 and 1.2 and 1.5 percent in the next two years respectively.
Inflation and Core inflation in the Euro area in percent
5
4
3
2
1
0
-1
Inflation
Core inflation
Source: Macrobond
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Several euro area countries are already close to the two-percent target with some Baltic countries already well above this threshold. Moderate price increases in the large member states, France and Italy, however, have kept the average down.
Inflation and Core inflation in percent 5
4
3
2
1
0
Inflation
Core inflation
Source: Macrobond
European Central Bank situation is not getting any easier The ECB base rate is still at zero with the deposit rate at minus 0.4 percent. The ECB plans to continue its bond purchase programme of over 60 billion euros per month, at least until the end of March. In view of the current figures, it is likely that this programme will be prolonged, postponing a turnaround in monetary policy. The strong euro is curbing the upward trend in prices. The solid increase in production we are experiencing has triggered less inflationary pressure than comparable upturns have done in the past. Inefficiencies and untapped potential on the labour markets are stifling wage increases. But if growth continues, this gap in the labour market may close in the next few years. The situation of the ECB has become incomparably more complex. A sophisticated mix of instruments is required to handle growth without price pressure and the considerable heterogeneity among the members of the euro area. Loose monetary policy over longer periods of time can lead to overheating and bubbles on the financial markets. In this phase where the ECB is making sustained use of expansive instruments, micro and macroprudential supervision is especially important.
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Federal Reserve Bank steadily increasing key rates, Bank of England waits The US Federal Reserve Bank (FED) started increasing the key interest rate in late 2015. There have been four hikes since, up to the current target range of one to 1.25 percent as of the beginning of September 2017. In June 2017, FED head Janet Yellen signalised a further hike this year was possible. In view of the solid growth in the second quarter, a further increase is likely to be agreed at the FED meetings on 20 September or 1 November. The Bank of England’s (BoE) most recent move was to drop the key rate from 0.5 to 0.25 percent in August 2016. Nothing has been undertaken since. Some factors indicate an increase, others a decrease. While the inflation rate has been at over two percent since the beginning of the year, economic growth in the first two quarters of 2017 was disappointing. With growth rates of 0.3 preceded by 0.2 percent in comparison to the previous quarter, the United Kingdom was one of the worst performers in Europe. Insecurity about the country’s future course probably means that the BoE will adopt a "sit, wait and have a cup of tea" attitude in its monetary policy too.
Key interest rates in an international environment
7
6
5
4
3
2
1
0
European Central Bank
Federal Reserve Bank
Bank of England
Source: Macrobond
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Corporate lending still faltering Money (M3) and credit growth for non-financial companies is still well below the pre-crisis average. Although credit growth bottomed out in 2013, net new lending has stagnated at just over zero percent since 2015. The ECB’s expansive monetary policy has increased the money supply by around five percent. In comparison to the period before the crisis, money supply and lending has become increasingly decorrelated. Non-performing loans in bank balance sheets, the necessary consolidation of the banking sector overall and persistently weak economic prospects in some regions are considerable obstacles here. In view of these factors, it is all the more important to keep the focus on financial stability in the current wave of financial market regulation (Basle IV, CRR II and CRD V, EMIR, etc.) and avoid unintentional effects on corporate financing. The European Commission's Capital Market Union plays an equally important role here.
Credit and monetary growth in the Euro area, year-on-year in percent
20
15
10
5
0
-5
-10
Amount of credit
Money supply M3
Source: Macrobond
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Conclusion and outlook Growth in Europe has consolidated. Sentiment indicators and hard data are better than they have been for a long time. But despite the reviving engine, our economy is still not performing as well as the pre-crisis average. Growth rates are somewhat lower, unemployment is higher and productivity and wage developments are floundering. Structural rather than cyclical factors are to blame here. It is therefore all the more important that individual EU member states and European institutions show more ambition in structural reforms. Policymakers cannot rest on the laurels of the upturn. Budget deficits and government debt ratios will continue to decrease (see also Eichert et al, 2017) – a result of persistent growth rather than the efforts of policymakers. Conclusions for economic policy Diverse recommendations of international organisations have long identified what action is needed in Europe’s capital cities and in Brussels. The country-specific recommendations of the European Commission, the country reports of the OECD and the Article IV consultations of the International Monetary Fund all spell out pretty much the same recipe. For Germany, recommendations include increasing public investment, particularly in digital, transport and energy infrastructure. Deregulating the service sector and restructuring the pension system in a more forward-looking way are further familiar points on the agenda. The upturn offers the new federal government an excellent starting position to implement extensive reforms in these areas efficiently and in a socially responsible manner. The BDI stated its view on these issues in a growth and investment programme and recommendations for action in the run-up to the federal elections (BDI 2017a and 2017b). A steady focus on innovation and productivity with tax incentives for research, strengthening public research and rapid anchoring of digitalisation and Industry 4.0 in companies and on the labour market are what we need. The priority for other member states such as Italy and France are their respective labour markets. Former Prime Minister Renzi and President Macron have already made promising moves in this area and the progress achieved shows that there is more potential. The healthy state of the economy gives us the ideal opportunity to modernise our national economies. At the EU level, reforms in the euro area are the top priority. Great coordination is needed in economic and financial policy with the help of a euro finance minister to pool competences that have so far been fragmented. Work on creating a stabilisation budget also needs to commence without delay. In his speech on the state of the European Union, European Commission President Juncker mentioned several reform plans. Now is the time to implement them.
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Sources Bundesverband der Deutschen Industrie (2017a). Handlungsempfehlungen der Deutschen Industrie für die 19. Wahlperiode des Deutschen Bundestages. Berlin. --- (2017b). Wachstums- und Investitionsprogramm. Berlin. Eichert, W., Niebling, M., Jäger, S. (2017) Sluggish upturn. Maintain reform path in the face of uncertainty. European Growth Outlook. Bundesverband der Deutschen Industrie. Berlin. European Central Bank (2017). Von Experten des Eurosystems erstellte gesamtwirtschaftliche Projektionen für das Eurowährungsgebiet im September. Frankfurt/M. European Commission (2017). European Economic Forecast: Spring. Brussels. International Monetary Fonds (2017). World Economic Outlook – Update. Washington, D.C. Lange, F., Watson, J. (2017), Economic Outlook, Spring. BusinessEurope. Brussels. OECD (2017). Economic Outlook: June. Paris.
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European economy in the fast lane. BDI expects over two percent growth 28/09/2017
Imprint BDI – Federation of German Industries Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Authors Dr. Wolfgang Eichert T: +32 2 792-1014 w.eichert@bdi.eu Solveigh Jäger T: +49 30 2028-1533 s.jaeger@bdi.eu Zoe Lechner BDI Representation Brussels Editorial / Graphics Dr. Klaus Günter Deutsch T: +49 30 2028-1591 k.deutsch@bdi.eua Marta Gancarek T: +49 30 2028-1588 m.gancarek@bdi.eu
This Global Growth Outlook is a translation based on “Wachstumsausblick Europa” as of 27 September 2017.
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