Ιn an article published today “European Economic Outlook: As Good As It Gets,” S&P Global Ratings says that a large number of indicators suggests that the current upturn in the eurozone should extend well beyond 2017.
This doesn’t mean that nothing could derail the recovery, however. Even though economic fundamentals are generally showing resilience, Standard & Poor’s sees risks emanating from the political side, with crucial elections taking place this year in several countries, such as France and Germany.
Yet S&P foresees most countries reducing their output gaps in the coming three years. The rating agency expects monetary policy, which helped reduce lending costs and stimulate investment in 2014-2016, will remain supportive this year. But the report notes that–in contrast with 2012 when the second dip in GDP growth took place–fiscal policies are likely to remain broadly neutral across the eurozone.
Output in Germany, on the other hand, has already reached its potential with a full-employment economy. Indeed, the German economy is a special case, according to the report, having recovered more rapidly than its neighbors’ after the global recession. Until 2009, Germany’s surplus relied heavily on the rest of the eurozone. The rebalancing of the country’s surplus after 2009 has been primarily toward the U.S., the U.K., and emerging markets, excluding China.
What’s more, German investment in the eurozone’s periphery has declined sharply since 2009 on the heels of the global crisis, while increasing substantially in The Netherlands, particularly in 2014 and in 2015.
S&P expect the European Central Bank (ECB) will extend its quantitative easing program to 2018, but start reducing the volume of asset purchases to €40 billion per month in the second half of this year (“smaller for longer”). At the same time, S&P thinks the ECB will bring its negative deposit rate closer to zero in the latter part of 2017, but keep its main policy rate at the current level until at least 2019.