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Europe’s surprise boom will keep going

The eurozone's economy expanded by 2.4% in 2017, compared with analysts’ average forecast of 1.5%. So what went right?

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Germany's economy is riding high

2018 Getty Images

In last year's poll of eurozone economists, most correctly forecast weak inflation and yet more money-printing by the European Central Bank (ECB). But as so often, analysts missed the most important thing that happened in 2017: "no one predicted how far eurozone growth would surge back", says Claire Jones in the Financial Times. The single-currency area expanded by 2.4% in 2017, compared with the analysts' average forecast of 1.5%.

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So what went right? A happy confluence of several factors. For one thing, the fiscal squeeze is easing; banks are slowly recovering and able to lend more; and the global economy has strengthened too. The latter factor is crucial to continental Europe: exports comprise 44% of eurozone GDP, compared with 15% in America and around 25% in the UK. Eurozone investment and consumption have bounced back due to the improving backdrop, continued low inflation, and the healing labour market. Structural reforms, notably the liberalisation of the Spanish and French labour markets, have also bolstered confidence.

Profits are on the rise

Growth has reached its strongest levels for six years, and there should be more to come. The eurozone Economic Sentiment Indicator, a gauge of business and consumer confidence, is at its highest for 17 years. Germany is faring especially well: the Ifo business confidence indicator hasn't been this high since German reunification in 1990. Surveys point to the tightest labour market in 30 years, says the Neue Zrcher Zeitung.

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No wonder, then, that corporate profits finally overcame years of stagnation last year, with earnings growth expect to total 13%. Analysts are pencilling in another 7%-10% for 2018.

Keep an eye on politics

Meanwhile valuations remain much more reasonable than on the other side of the Atlantic, while there will still be ample liquidity. The ECB is about to start reducing its monthly bond purchases with printed cash, but this means it is merely loosening monetary policy more slowly rather than tightening. Hence the threats to Europe's recovery will be more political than economic in 2018.It would be disproportionately affected by protectionism in the global economy, so investors will be watching carefully for signs of a trade spat between the US and China. The euro crisis could flare up again this spring (see box below). But on balance it's no wonder that most fund managers surveyed by the Association of Investment Companies think Europe is the most promising region in 2018.For once, the crowd may be right.

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