Europe: Growth to slow in 2017, in particular in the UK - Commerzbank

Research Team at Commerzbank expects the euro area to grow at a rate of 1.5% in 2017, which is slightly lower than in 2016 as it will have to deal with intensifying EU disintegration fears on various fronts.

Key Quotes

“First, there is Brexit. Theresa May is willing to trigger Article 50 by March 2017, but this might be too ambitious after the High Court ruled that Parliament has to vote on the Article 50 process, and a decision on the appeal at the Supreme Court is not expected before early 2017. Irrespective of this – the rhetoric has recently hardened. But this is potentially just noise. In our economists’ opinion, the process to negotiate a new trade agreement between the EU and the UK is likely to take longer than two years. The uncertainty emanating from this should see 2017 UK growth at 1.4% only after an expected 2% for 2016.” 

“Second, there are political risks from elections in the Eurozone. In the Netherlands, the EUsceptic PVV is leading in the polls for the March general election. While the other parties will form a coalition to rule without PVV, their rise will have negative effects on the politics of the others. In Germany, polls indicate a greater fragmentation of the parliament, with the Grand Coalition only just keeping its majority.”

“Third, the ECB will have to taper its sovereign bond purchases later in 2017. It will simply run out of buyable bonds. Important in this regard is the issuer limit of 33%, which appears to be set in stone. Taper discussions could commence as early as Q1 2017. To reduce the negative impact of less asset purchases, the ECB could for example offer 5-year tenders. Still we expect increased volatility both in Bund yields and in peripheral spreads as well as ultimately higher peripheral spreads.” 

“The uncertainty emanating from these developments coupled with political paralysis is likely to weigh on growth in the Eurozone, and in particular in the UK. The risk of the sovereign debt crisis re-surfacing cannot be denied. We believe, however, that Draghi’s “Whatever it takes” will not be called into question by markets.”