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2018 European Outlook: Economics and Politics

by | Jan 8, 2018

Indecisive election results in Germany and Catalonia remind us that populist challenges to the status quo have not gone away since the UK referendum and Trump’s election.  But there looks to be too much wind in the sails for this to becalm the European economic recovery in 2018.

By and large, 2017 was the year when the political threats from within Europe failed to bite, but there were two stings in the tail end of the year.  One was the indecisive election result in Germany where the far right did better than expected. The other was the similarly inconclusive re-run of the regional elections in Catalonia. We think that both issues will resolve themselves eventually with the German coalition being settled rather sooner than the Catalonian issue.

So, what are the economic prospects for 2018 and beyond? The international economic environment looks pretty benign in 2018.  US economic growth has picked up after a hesitant start to 2017, the Chinese economy is slowing marginally and fears of an emerging markets crisis have receded. Oil prices have picked up since the end of 2016 but, at around $60 a barrel, are far below the $100 plus prices achieved as recently as early-2014.

Most European economies finished 2017 strongly. Economic confidence is within a whisker of a 30-year high so we see no reason why the positive economic environment should not continue into 2018 helped, for now, by a continuation of the ECB accommodative monetary policy.  In GDP growth terms, the countries leading the recovery will be Spain (despite uncertainty over Catalonia), Sweden, the Netherlands, Ireland and practically all of Central Europe. Equally significant is continued strong growth in Germany – by German standards – and the pick-up in French economic growth inspired partly by the Macron reform programme.

Unforeseen events aside, the next major headwind for Europe is expected to be a cyclical downturn in the US in late 2019/2020.  At present the US economy is enjoying a renewed bout of growth, which will be re-enforced by tax reform and the new budget. By 2019 this growth spurt may well be running out of steam and tighter monetary policy will start to bite, leading to a sharp slowdown before a cyclical rebound from 2021.

If we are right about the US, the European recovery will also run out of steam by 2020 as higher long-term interest rates and the US slowdown take their toll. However, there will be a rapid bounce-back in 2021-2 once interest rates have fallen back.

The 2020 slowdown will dent long-term growth averages but many parts of Europe will still out-grow the USA over the next three years. Of these, the hardest economy to forecast is the UK. Our forecast assumes another three years of subdued but still positive economic growth followed by a strong bounce-back once Brexit-related uncertainties are out of the way and the international economy picks up again. That said, clear uncertainties, either way, remain.

Click here to read the full CBRE 2018 European Outlook.

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