Ungated Post | 20 Nov 2017
Europe may be poised for a golden decade of economic expansion
Lost amid Europe’s political drama and recurrent euro doomsday scenarios is the fact that the Eurozone economy has a business cycle that is alive and well.
Our analysis suggests there is plenty of room left in the current expansionary cycle, which could see the single currency area enjoy a golden decade of economic growth.
More than four years into the current upturn, most indicators signal the Eurozone economy is still somewhere around mid-cycle, suggesting that – absent an unexpected shock – we should see several more years of sustained expansion.
One reason is that the amount of economic slack in the Eurozone countries – the size of the “output gap” before an economy hits a ‘speed limit’ above which growth comes with inflation – may be larger than commonly accepted.
This would then translate into a longer runway for the Eurozone economy to continue to expand without the need for the European Central Bank to apply the brakes with tighter policy.
The old adage “expansions do not die of old age” remains true. The number one cause of death for economic expansions is an inappropriate policy response.
But an ultra-dovish ECB, and the end of the fiscal adjustment process across the Eurozone, means that there is only a very slim chance of either monetary or fiscal policy derailing the recovery.
As a result of the double dip recession in 2010-12, the Eurozone region is now lagging the US economic cycle by several years, but the performance during the current expansion is comparable to the first four years of the cycle that started in the US in 2009.
While the comparison is far from perfect, the US economy – now in its ninth year of expansion – suggests the Eurozone could enjoy a similar period of growth.
Unexpected shocks do happen and could, of course, derail the recovery. Big geopolitical events or protectionist shocks to world trade are the main external dangers, whereas political risk remains the major domestic threat.
But the chances that the Eurozone is embarked on a “Euroboom” with legs look to be the best for years if these risks do fail to materialise.
You may be interested in
BIS Oxford Economics to be rebranded as Oxford Economics Australia
Over the past six years we've maintained the unique modelling and analysis that clients and the media have come to rely on from BIS Shrapnel while incorporating Oxford Economics' rigorous global modelling and analytical framework to complement it," said David Walker, Director, Oxford Economics Australia.Find Out More
Introducing our renovated African Forecasting Service
From economy to politics, investment to operation, fuel your business growth by leveraging our complete Africa solutions.Find Out More
Our new global trade service: TradePrism
TradePrism is the most comprehensive forecasting service for trade. Offering 1200 product-level forecasts of trade between 46 major economies, and high-level indicators for an additional 137 economies delivered through an interactive data visualisation platform allows organisations to understand the key trends across global trade.Find Out More