Member state elections put pressure on the Eurozone

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Recent optimism the eurozone economy has finally turned a corner on growth and inflation is on shaky ground and will only be maintained if there are no major upsets in several national elections this year, a Reuters poll showed on Thursday.

Respondents saw the last quarter of 2016 and the first two quarters of 2017 each registering 0.4 percent growth, with average full year growth seen at 1.5 percent this year and next. Inflation would be 1.4 percent in both 2017 and 2018.

The euro zone economy grew 0.3 percent in last year’s third quarter, similar to the previous three months, with all members of the currency bloc reporting an expansion, even in peripheral economies such as Greece.

There have been signs of more robust growth since, however.

Industries across the euro zone cranked up output in November and Germany ended the year with its strongest growth in five years, for example.

Yet the poll of over 65 economists this week showed little change in forecasts for growth and inflation with respondents citing uncertainty from rising protectionist sentiments after the Brexit vote last June and Donald Trump’s US election win.

Elections are also due this year in Germany, France, the Netherlands and possibly Italy.

It was a similar trend across recent Reuters polls on foreign exchanges rates, bond yields and major economies.

“Europe may be in for a rough ride this year,” said Tomas Holinka, economist at Moody’s Analytics.

“While we expect the economy to expand at about the same rate as in 2016, political anxiety about the 2017 voting season could send it off the rails, while tough negotiations over Britain’s exit from the European Union could throttle trade.”

A majority of respondents who answered an extra question in the poll said the euro zone economy doesn’t have enough momentum to withstand any major political change in the coming year.

Italy’s constitutional reform referendum last month sent the euro to a 21-month low against the US dollar and while its impact on financial markets was not as much as the Brexit vote in June 2016, it did boost political uncertainty.

A Reuters poll last week predicted the euro will weaken to $1.04 by end-December, from around $1.06 now, and strategists gave a median 50 percent chance it would reach or fall below parity with the dollar in 2017.

ECB

Having already spent over 1.4 trillion euros buying mostly sovereign bonds, the ECB last month unexpectedly said it would trim its monthly spend to 60 billion euros from April. It currently spends 80 billion euros a month.

That move shocked financial markets since euro zone inflation is still only around half the ECB’s target of just under 2 percent, despite years of money printing twinned with a zero policy rate and a negative deposit rate.

While euro zone inflation in December was the highest in 3-1/2 years, the outlook for price growth remained weak.

Not a single economist in the sample of over 60 had a 2 percent inflation call this year or next.