EIC Analysis / Interesting Topics
Eurozone economy: Outstanding growth amid lingering political risks
26 July 2017

Published in EIC Outlook Q3/2017 Click here for more detail

 

 

The Eurozone grew 0.6% QOQSA1 or 1.9%YOY in the first quarter of 2017.The main drivers were recoveries in household consumption and private investment, in line with exports. The unemployment rate declined to the lowest level in eight years, at 9.3%, in May. The manufacturing PMI hit a six-year high of 57.0 in June. Nevertheless, the Eurozone economy is still driven mainly by core economies like Germany and France, whereas those on the periphery, such as Italy, Spain, Portugal and Greece, still face fragile growth prospects. For example, unemployment stands at still high rates of 11% in Italy and 18% in Spain.2

Economic growth in the third quarter might be affected by political risk in Italy. Germany’s election on September 24 is not of great concern in terms of EU unity given that both of the two leading candidates are pro-EU. Italy’s election, on the other hand, must be closely monitored if it is held in September, as suggested by former prime minister Matteo Renzi. Italy’s prolonged economic woes, especially in the banking sector, have driven the rise of the Five Star Movement (M5S), an anti-EU party. If that party wins enough seats to form a government, a referendum to leave the EU will be on the table. Italexit would shake the confidence of businesses and investors and weigh down hiring and household consumption. This shock could drag Eurozone growth below the 1.6% rate now expected in 2017. However, the probability of the election being held in September is 45%3

 

EIC projects that the European Central Bank will avoid tightening monetary policy this year, despite its previous indication it would turn toward a normal stance. Economic recovery in the Eurozone has yet to translate into rising inflation. Moreover, with political uncertainty looming, the ECB will have to take a gradual approach in normalizing its monetary policies. At the upcoming meeting on September, the ECB will likely announce its plan to taper its QE to 40 billion euros per month, down from 60 billion euros today, starting in January 2018 and continuing at that level for another six to nine months. Interest rates would likely start to rise in the third quarter of 2018.

 

 

Implications for Thai Economy

  • Thai exports to the Eurozone expanded 5.4%YOY in the first five months of the year. The rebound in Eurozone consumption will translate into higher demand for Thai exports, especially of computers and parts, and cars and parts.

     

  • The Thai government’s use of Article 44 to allow foreign companies to hold more than a 50% share in aircraft maintenance and parts production businesses in the EEC will attract more FDI from Europe, especially from Airbus, the French aircraft manufacturer.

     

     

  • A decline in concern regarding EU political and economic risks after the French election turned out as expected, and steady recovery in the Eurozone economy helped the euro strengthen by 8.0% against the dollar, or 2.5% against the baht4. However, EIC expects the euro to weaken to 1.08 against the dollar before the end of 2017 due to political uncertainty in Italy and the Fed’s rate hikes.

 


1 Quarter-on-quarter growth, seasonally adjusted

2 Data as of May 2017

3 according to an estimate in June by Teneo Intelligence, a political risk consultancy

4 Changes in EUR as of July 3, 2017, compared to the end of 2016.

 

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