The euro zone might be clouded by political uncertainty with fears of populist victories in key elections across the bloc. But not so fast, says Deutsche Bank, none of these risks should end up materializing, allowing a pickup in growth in the second part of this year and the European Central Bank to start winding down its stimulus program the following year.
However, investors should keep an eye out for Belgium, France, Italy, Spain and Portugal, the bank said.
“Our baseline scenario for Europe has high political uncertainty weighing on activity in (the first half of 2017) H1’17 but no political risks materializing. This should release an acceleration in economic growth into H2’17 and 2018 and trigger ECB tapering,” Deutsche Bank said in a note released Friday.
The bank noted that the euro area has surprised on the upside showing robust economic data. If indeed, political risks do not materialize, “further positive momentum could be added to what may already be a stronger-than-expected cyclical recovery,” the bank said.
But there are a number of euro economies that need to be monitored, Deutsche Bank added.
Using the European Commission’s early-warning indicator for fiscal crises, – S0, which is expressed on a scale of 0 to 1, where 0 means none of the indicators are above the crisis threshold and 1 means all of them are above that line– Deutsche Bank noted that one euro country, Belgium, saw deficit figures returning and its gross financing needs picking up above 20 percent in 2016.
“Only one country showed a decline in its S0 indicator between 2015 and 2016 (Ireland, modestly). The largest increase was in Belgium, where the primary balance moved back into deficit and gross financing needs rose above 20 percent of GDP (gross domestic product). Otherwise, the largest increases were: Italy, Portugal, Spain and France,” the bank said in the note.
Belgium’s deficit stood at 2.5 percent of GDP in 2015. But according to the latest European Commission forecasts, this is set to have risen to 2.9 percent last year. Similarly, its gross public debt is estimated to have moved from 105.8 percent of GDP in 2015 to 106.8 percent of GDP in 2016.