Yesterday the euro rocketed past the 1.200 mark against the dollar; today it failed to maintain its recent momentum sliding back to around 1.195. Still that’s quite some gain year to date from the 1.05 level it begun the year on, and even further from the warnings of parity that were then forecast for 2017. Much of those previous expectations were based on hopes that Trump’s reforms would boost growth in America and at least one more political domino would fall in the Eurozone during the election season. It’s largely due to the failed-realisation of both of these that the dollar has weakened and the euro strengthened.
These developments, or lack thereof, are also presenting themselves in the growth forecasts in both these regions - with Moody’s both downgrading the outlook on the US and upgrading estimates for the Eurozone. Specifically in their ‘Global Macroeconomic Outlook’, Moody’s now forecast growth for this year and 2018 at 2.2% and 2% for Germany, 1.6% for France and even a respectable 1.3% for Italy (all notably higher than previous estimates of 1.6%; 1.3% and 1.4%; 0.8% and 1% respectively). Meanwhile US growth expectations for 2017 and 2018 were revised down to 2.2% and 2.3% (from 2.4% and 2.5%).
In aggregate this means a wider euro area GDP growth forecast of 2.2% this year and 1.9% next year, both up 0.3 percentage points, with global growth expected above 3%, up from 2.6% in 2016. So although there is a mixed picture with many regions’ underperforming (or rather being the victims of excessive optimism) ‘the global economy has maintained solid momentum in the first half of 2017’ and economies such as that of the euro area look to continue to grow ‘above-potential’ which have relaxed short and medium term concerns for the region. But how different are the longer term fundamentals really?
Look beyond the next couple of years and Eurozone growth ‘above potential’ is intrinsically unsustainable while demographics and credit imbalances, on both an individual and national level, act as persistent headwinds to economic growth for many advanced economies. Welcome as these revised growth figures are, for certain euro members it still seems like taking a pick-axe to their mountains of debt: debts that accumulated over a generation and have been ignored and serially bailed-out for a decade. Deleveraging on a national level is still barely underway, meanwhile the rally of European currency, debt and stocks continue and Eurozone economic confidence today just hit pre-crisis highs. The result of all this is that finding investments in Europe that offer relative value and strong enough fundamentals from a credit and net foreign asset perspective seem about as common as a European politician who supports the UK’s positions on Brexit.