By SHERMAN TAM CHENG WEI
In the context of synchronised global growth, the outlook for the eurozone is as bright as it has been since global financial crisis in 2008.
After years of recession and political uncertainty, the clouds are starting to clear.
In 2017, European equity markets marched higher as economic recovery in the region accelerated and investors grew more confident, superseding concerns around the European Central Bank’s monetary policy outlook as well as stronger euro and political uncertainties in member states.
The current economic upswing can sustain in the coming months in 2018. Real gross domestic product (GDP) grew by 2.5% in 2017, the best year for the eurozone economy since it grew 3.1% in 2007.
On a quarterly basis, economic activity continued to record solid growth in the fourth quarter (4Q) with GDP growing by 0.6%.
The GDP of Germany, the eurozone’s biggest economy, grew 0.6% in the 4Q, slightly slower than the 0.7% expansion clocked in 3Q of 2017.
France and Spain posted faster growth at 0.6% and 0.7% for the 4Q respectively. For 2018, we expect the economic bloc to deliver stronger than expected GDP growth given with stronger cyclical momentum in Europe and better than expected pickup in global economic activity.
The eurozone consumer confidence edged to a near record high in January. Figures from the European Commission indicate the consumer confidence indicator surged by 0.9 points from December to 1.4 this month, pleasantly beating consensus’ estimates of just 0.1 point rise on the previous month.
Economic confidence across the continental has gone from strength to strength with official data suggesting both consumer and business have benefitted from a pickup in household spending.
Eurozone businesses started 2018 by ramping up activity at the fastest rate in well over a decade. IHS Markit’s Composite Purchasing Managers’ Index for the eurozone, seen as a good guide to economic health, ticked up to 58.8 points in January despite higher prices and a stronger currency.
Figures from Germany showed private sector growth was at near seven-year high, while in France the business expansion showed no sign of diminishing.
We believe economic growth in the eurozone has the potential to become more self-sustaining as demand rises across the single currency area.
The euro recorded its strongest year against the US dollar in over a decade last year.
While a stronger euro is likely to weigh on earnings of exporters, the single currency remains well below its 10-year average.
As such, European equities have been able to stomach the euro’s appreciation and advanced higher.
A better macro story should go hand-in-hand with a better micro story, and in this case, for corporate earnings outlook.
Corporates in Europe are expected to post about 11% earnings growth in 2018. We have faith European equities can continue to hold up against a further appreciation in the euro.