While a few months ago we perhaps looked overly bullish, recent data releases have suggested our above-consensus view on the European growth outlook is well-founded. Indeed, it looks like the European Central Bank (ECB) launched its Q2 quantitative easing (QE) programme just at the point when a cyclical recovery started taking shape in Europe (as shown in the above graph).
Economic data out of Germany have surprised to the upside: the IFO business confidence survey reached a 10-month high in April, and purchasing managers’ surveys also point to a more broad-based recovery across the region. Spain has been improving for some time and now Italy is also making progress. We expect to see further acceleration in growth over this year and next, as Europe will benefit from a number of positive tailwinds, among them improving consumer and business confidence and increased bank lending. While the ECB was widely expected to act, the scale and scope of the QE programme surprised markets and caused a sharp deterioration in the euro against the US dollar. This trend is set to persist as the ECB continues with its QE programme and the US embarks on a rate-hiking cycle. The lagged effect of a weaker currency, together with the lower oil price should further support a eurozone recovery.
Neil Walker – Insight, a BNY Mellon company