Eurozone – what to watch for in 2018

02/01/2018

| 02-01-2018 | treasuryXL |

As we start a new year, it would be beneficial to look at matters that will possibly affect the Eurozone in 2018. It is 10 years ago that the financial crisis that started in America hit Europe and led to a global recession. This had a negative effect on GDP and it took 8 years before the Eurozone’s economy exceeded its high before the crisis. The EU is forecasting growth of 2.1% for 2018 and 1.9% for 2019. So, what are the events to look out for in 2018?

Whilst the economy appears to be growing, this recovery is still fragile and reliant on a monetary policy of low interest rates and a huge bond buying programme – QE – undertaken by the ECB. QE will be scaled back in 2018, leading to a possible halt in September 2018. It will be important to see how the markets react after the programme is stopped.

The political picture is still confusing and indecisive: in Germany a government has still not been formed more than 3 months after the elections; the referendum in Catalonia for independence and the recent regional elections have put pressure on both Spain and the EU; Italian general election in March 2018 will also add to the tension – the Eurosceptic parties appear to be growing in popularity; Greece is hoping to return to the international bond market and raise funds in the first half of 2018, but they still need to successfully exit the existing bailout programmes.

On the negative side, there is a clear difference of opinion between East and West Europe on many policies – particularly immigration – that threatens to upset the balance within the EU. Also, ambitious plans put forward by France for a Eurozone budget, will become stalled as Germany cannot commit since they have no government and Merkel is not in a true position of power to support France.

Brexit will remain a hot topic and we can expect another year of political statements. Article 50 has been enacted and there is no way back. Even though the Conservative party rely on a coalition to govern, they still have another 4 years on their current term and can negotiate from the British point of view.

Inflation shows no sign of growing – the increase in the value of the Euro against the USD and GBP should act as a brake on inflation via import prices. Pressure on wage increases is also very low – particularly within the southern part of the Eurozone, where unemployment is still very high. Interest rates also show no signs of increasing – 3 month’s futures still show a negative yield curve throughout 2018.

Quick thought – Bitcoin futures have started, but will the market really take off? The value has increased greatly in 2017, but the Bitcoin itself has done nothing productive to justify its increase in price.

In general, the outlook appears to be very steady if not spectacular. So, beware – there is always a calm before the storm!

 

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