GLOBAL ECONOMICS

| SCOTIABANK’S GLOBAL OUTLOOK 

January 17, 2017

CONTACTS
Eurozone
Frédéric Prêtet
 Eurozone growth is re-accelerating, and stronger-than-expected 33.1.703.77705 (Paris)
Fixed Income Strategy
external demand could create an upside surprise. frederic.pretet@scotiabank.com

 Inflation will temporarily move closer to 2.0% y/y in Q1, while core
inflation is forecast to gradually rise.
 
 The ECB could gradually turn more hawkish.

ACCELERATING ECONOMIC GROWTH…

Recent months have strengthened our scenario of stronger growth at the turn of Chart 1: Exports To Pick Up
the year. German Exports & Estimate
40
Although the recovery on the supply side of the economy is still lagging with y/y % change
Eurozone manufacturing production showing flat growth in October/November 30

Forecast
relative to Q3, the demand and export side of the Eurozone has clearly
20
strengthened in the final quarter of 2016. Indeed, retail sales sharply rebounded in
October, while consumer confidence reached its highest level in almost two years 10
in December. In the meantime, exports increased for the third month in a row in
0
October. In view of this data, Q4 Eurozone real GDP could expand by around
0.5% q/q, up from 0.3% in the previous two quarters. -10 * R2 = 0.88
with US ISM
Furthermore, rising business confidence points to ongoing strength at the -20 manufacturing
beginning of the year. In view of historical elasticity, Eurozone real GDP in Q1 China PMI
-30 EUR/USD
could register growth of close to 2.0% y/y, implying a 0.5/0.7% q/q increase. This
German Exports *Estimate
would likely create arguments for a potential upward revision to the ECB’s -40
Eurozone growth projection this year, which is presently forecast to rise by 1.7%. 2007 2009 2011 2013 2015 2017

Looking beyond this short-term cyclical acceleration, it is also helpful to address

the other underlying drivers of Eurozone growth. Compared to three months ago,
there have not been many changes in the stimulus offered to the area. Indeed,
while the recent drop of the euro offers a stronger support for corporates’
competitiveness, it is offset by the adverse impact of higher oil prices on
households’ purchasing power and consumption. In the meantime, the stimulus
offered by fiscal policy to Eurozone real GDP seems to be roughly the same as
assumed three months ago, at around 0.2% of GDP and the rise in interest rates
has, so far, remained limited, thus continuing to offer favourable financial
conditions. So, all in all, we maintain the view that the positive impact of both
monetary and fiscal policy could add roughly 0.5 percentage points to GDP this
year. With Eurozone potential growth estimated at around 1.1% by the EU
Commission, a growth scenario of between 1.5% and 1.7% for 2017 looks valid.

However, the upward surprise could come from stronger-than-expected external

demand. Indeed, global business sentiment has remained surprisingly resilient
despite rising political uncertainties following the UK’s vote to exit the European
Union and the surprise election of Donald Trump as the US President in
November. The global PMI manufacturing index has returned to its highest level in
two years, which points to stronger export growth than previously anticipated. As
an example, we estimate that German export growth—the benchmark by which to
assess how global demand is supporting Eurozone exports—could be rising by

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