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Europe market review (September 2017)

Europe’s economy continues to strengthen

The eurozone’s economy grew by 0.6% in the second quarter of 2017, having posted quarterly growth of 0.5% in the first three months of the year. Output in the region’s manufacturing sector grew at its most rapid rate since April 2011 during September. In Germany’s Federal elections, Chancellor Angela Merkel managed to achieve a fourth term in office.

  • The ECB predicts economic growth of 2.2% this year
  • The ECB expects inflation to remain below target in 2018 and 2019
  • Fitch confirmed Germany’s “AAA” credit rating

“EC President Jean-Claude Juncker described Brexit as “a sad and tragic moment in our history”

In closely watched Federal elections, German Chancellor Angela Merkel managed to achieve a fourth term in office ; however, her victory was soured by her smaller-than-expected share of the vote. Earlier in the month, credit ratings agency Fitch affirmed Germany’s credit rating at “AAA” with a “stable” outlook. In its report, Fitch highlighted Germany’s “diversified, high value-added economy, strong institutions and history of sound public debt management”, and also cited its substantial current account surplus, which has remained about 7% of GDP since 2014. The Dax Index rose by 6.4% during September, while France’s CAC 40 Index climbed by 4.8%.

The eurozone’s economy grew by 0.6% in the second quarter of 2017, having posted quarterly growth of 0.5% in the first three months of the year. The outlook for the euro area has continued to improve, and the European Central Bank (ECB) now expects the region’s economy to grow by 2.2% over 2017 as a whole. Commenting on the recovery, ECB President Mario Draghi said, “It’s robust, it’s broad-based, and… six million jobs were created since 2013”. On a somewhat less positive note, the ECB expects inflation to remain below its 2% target, forecasting a rate of 1.2% in 2018 and 1.5% in 2019.

In his annual State of the Union address, EC President Jean-Claude Juncker described Brexit as “a sad and tragic moment in our history”, but went on to say, “Brexit is not everything… Brexit is not the future of Europe”. He called for a special EU summit to take place on 30 March 2019 – the day after Brexit – to discuss the future. In his speech, he made a case for greater unity and integration within the EU. He also urged member states to unite in defending the single currency, and to ensure that the eurozone never again finds itself in a situation in which it has to call for “external help”.

The eurozone’s economy wound up summer 2017 with a “burst of activity”, according to the IHS Markit Composite PMI . Output in the region’s manufacturing sector grew at its most rapid rate since April 2011 during September, and employment in the sector grew at its strongest rate for over two decades. Looking ahead, a sustained increase in business activity, alongside mounting prices, is likely to intensify pressure on ECB policymakers to wind up its stimulus programme.

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