EU Forecasts Stronger Euro-Area Growth as German Core Stabilizes

(Bloomberg) -- The euro-area economy will expand faster than previously anticipated this year and next, according to the European Commission, which said growth in the region is more balanced than at any time since the financial crisis.

The 2.3 percent pace projected for 2018 is up from 2.1 percent forecast in November and close to the decade-high rate of 2.4 percent reached in 2017. The 2019 forecast was upgraded to 2 percent, and the outlook is broadly in line with the most recent projections from the European Central Bank and the International Monetary Fund.

The rosier outlook reflects improving labor markets, stronger cyclical momentum and buoyant sentiment, as well as a pickup in global trade. The publication came just hours after German Chancellor Angela Merkel’s bloc concluded a coalition agreement that ends four months of political stalemate in the euro area’s largest economy, which has long been the pillar of stability in the currency union.

The coalition deal in Germany could ultimately mean progress for those pushing for greater European Union integration to build resistance to the type of crisis that almost pulled the bloc apart earlier this decade. That’s because it hands key posts to the Social Democrats, who have been pushing for deeper ties. 

Pierre Moscovici, the EU’s economic affairs commissioner, said there is a “very strong pro-European will” within the coalition leaders.

Ten-year bond yields declined in Italy, Spain and Portugal. The euro was little changed at $1.2348; it’s risen almost 5 percent in the last six months.

Robust Health

After years tackling the financial and sovereign-debt crises, the euro-area economy has racked up 19 straight quarters of growth. It came through a critical electoral year in 2017 that saw anti-EU populists defeated in a series of key votes, and Germany now has a government. But risks remain, including the U.K.’s withdrawal from the EU.

In its report, the commission also warned of the “potential of a sharp correction in financial markets.” There’s already been a taste of that, with bonds and stocks hit by a global rout in the past week on concern about inflation and tighter monetary policy. Wednesday saw a small rebound in European stocks, but a sustained slump could damage confidence and global growth.

Moscovici said the expansion is strong and he’s not worried about the impact of the selloff on the economy, adding, “I hope it’s not famous last words.”

Other dangers were highlighted by the ECB on Wednesday. Daniele Nouy, head of the ECB’s supervisory arm, said that nonperforming loans are a “major issue” and that lenders must do more to clean up balance sheets.

The problem is particularly heightened in Italy, where a number of banks were rescued last year and which faces elections in less than a month.

On inflation, the commission raised its 2018 forecast to 1.5 percent and left its 2019 prediction at 1.6 percent. The ECB aims to get inflation to just below 2 percent over the medium term.

Policy makers at the central bank are trying to judge how and when to end their bond-buying program, which is scheduled to run until at least September. ECB Executive Board member Sabine Lautenschlaeger said on Wednesday that the bank is on the right path to meet its goal and should halt its bond-buying program this year.

But earlier this week, ECB President Mario Draghi said the central bank still can’t claim success in its struggle to restore inflation.

“While our confidence that inflation will converge toward our aim of below, but close to, 2 percent has strengthened, we cannot yet declare victory on this front,” he said.

--With assistance from Joshua Robinson and Zoe Schneeweiss

To contact the reporter on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Fergal O'Brien at fobrien@bloomberg.net, Jones Hayden, Kevin Costelloe

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