Europe has achieved a great 2017 in terms of its main economic data. If we look only at the growth data, the European Union and the Eurozone have achieved a dynamic of growth that accelerated markedly in exercise.
In figures, until the third quarter of the year, both the economy of the European Union and the Eurozone have increased their growth rates to 2.6%. This improvement responds to its factors, including France, which has managed to double its growth, going from a rate of 1.2% to a rate of 2.3%.
However, Europe is not free of risks and as we will see below, by 2018 Europe will have to face the monetary policy of the ECB, the risk of an increase in the price of oil, negotiations with the Brexit and, lastly, a special approach to Spain and the political risk of Catalonia.
Turning in the monetary policy of the ECB
ECB interest rates remained unchanged during the year and are expected to remain at their current levels during this 2018. The big change is that from January 2018, the amount for conventional measures will stop from 60.00 million monthly euros up to 30,000 million.
Currently the balance of the ECB has reached the figure of 4.47 billion eurosand the program of monthly purchases would end in September 2018, or later, if necessary, or until you see a sustained adjustment in the path of consistent inflation with its inflation target (close to 2% in the medium term).
The risk of this change lies in the cost of financing the states. Remember that the states are refinancing debt maturities for each year. With the intervention in the secondary debt market, we have seen a depressing effect on returns and, therefore, on the cost of financing for issuers.
If the ECB reduces the pace of purchases, the degree of manipulation in the bond market will be lower and, consequently, the IRRs of the bonds will tend to reflect the risk of the issuers. And here the problem arises… In the Eurozone we have several countries with a public debt around 100% of GDP.
Perhaps the most notable case is Italy, the third economy of the euro, with a public debt of 132% of GDP (the second highest ratio in the Eurozone after Greece), with high delinquency in the banking sector and in In recent years it has suffered a stagnation in its economy with low growth rates.
This can be one of the great problems of the Eurozone because, unlike Greece, Italy is not redeemable with 2.27 trillion euros in public debt. The end of the QE will lead to higher spending on the Italian debt service being especially sensitive to an external shock, and by extension the Eurozone.
Rises in the price of oil
During 2017 there was a rebound in the oil market, with an increase in demand and also waiting for the extension of the current OPEC agreement beyond March 2018.
The geopolitical tensions following the Kurdistan independence referendum in Iraq in late September and the concern over US sanctions against Iran have also supported higher oil prices. Prices remain well above the levels before the OPEC agreement in November 2016.
We have also seen a year of production reductions driven by OPEC and Russia, which started last January and are scheduled for 2018. Pipeline disruptions in Libya and the North Sea have also supported oil prices.
Due to these factors, the price of Brent has risen sharply in 2017 to 66.4 dollars, a rise of 19%.
If tensions spread in the oil-producing countries, it is likely that crude prices will continue at relatively high prices because of the risk that affects the supply of the supply. High oil prices have an impact on those economies that are more dependent, as is the case in Spain, which could lead to an upturn in consumer prices.
United Kingdom, the European Union and the Brexit
The divorce between the United Kingdom and the European Union is particularly damaging to the first part. It can be seen clearly in the figure of growth of the United Kingdom that advances at a rate of 1.7% (year-on-year growth of the third quarter), being the weakest data since the first quarter of 2013 .
In contrast we have that the European Union grew 2.60% but the most interesting thing is that in recent months the growth rate of the United Kingdom has slowed down, at the same time as the European Union has not stopped improving.
Although the British economy has slowed down, the big problem lies in the strong advance of inflation resulting from the devaluation of the pound sterling . Consumer inflation in the United Kingdom rose by 3.1% in the year to November 2017, the highest inflation rate since March 2012.
Depending on how the negotiations evolve in the coming months, the repercussions for the United Kingdom will be more intense and may perhaps be transferred to European companies with interests in the United Kingdom. In the month of November, after months of negotiations, the United Kingdom the European Union reached a principle of agreement on the bill that would be in a figure of around 45,000 million 55,000 million euros.
Spain: Political risk focuses on Catalonia
As we have already mentioned, the turn in the ECB’s monetary policy can embarrass those most indebted countries, and among them Spain would have a public debt very close to 100% of its GDP.
However, currently the political risk in Catalonia is the main risk factor for the Spanish economy. This risk is not linked to the eventual independence of the autonomous community but to the loss of confidence of investors and consumers. For Europe the risk of Catalonia lies in the fact that independentist movements can flourish in the member countries that imitate what happened, betting on the unilateral route.
This unilateral way has not gone free. Catalonia was harmed in October and in November with some data that have not been positive whole:
- Hotel Price Index: + 4.49% Spain vs -0.45% Catalonia.
- Variation of income per room: + 7.30% Spain vs -1.69% Catalonia.
- Unemployment: + 0.21% Spain vs + 1.78% Catalonia.
In spite of everything, the advantage of the Spanish economy lies in a dynamic of growth and very intense job creation. It is expected to end up closing the year with a GDP growth rate of 3.1% and the decrease in the unemployment rate has reached a figure of 16.4% over the total active population.
After the celebration of the Catalan elections on December 21, 47.5% of voters chose pro-independence parties but with parliamentary representation they make up the majority in the Parlament. It will be necessary to see in the next months the formation of the executive, if this continues or not by the unilateral route and how the application of article 155 is retreated.