IMF Warms to Eurozone Economy Amid Lower Political Risks

The International Monetary Fund is more optimistic about the economy of the 19-country eurozone after a run of elections saw populist politicians defeated and risks to its outlook abated.

In an update to its April projections published Monday, the IMF revised up its growth forecasts for many eurozone countries, including the big four of Germany, France, Italy and Spain, after stronger than anticipated first quarter figures.

Germany, Europe’s biggest economy, is projected to grow by 1.8 percent, up 0.2 percentage point on the previous estimate, while France is forecast to expand 1.5 percent, up 0.1 percentage point. Projections for Italy and Spain have been revised higher by a substantial 0.5 percentage point. The two are now expected to grow by 1.3 percent and 3.1 percent, respectively. All four are also expected to grow by more than anticipated in 2018.

Overall, the IMF expects the eurozone to expand by 1.9 percent this year, 0.2 percentage point more than its previous projection. That’s just shy of the IMF’s 2.1 percent forecast for the U.S., which was trimmed by 0.2 percentage point. However, it’s slightly ahead of Britain’s, whose projected growth was revised down 0.3 percentage point to 1.7 percent following a weak first quarter that raised concerns about the country’s economy ahead of its exit from the European Union.

The IMF’s eurozone upgrades come amid rising confidence in the bloc following a series of elections that saw populist politicians defeated, most notably in France, where Emmanuel Macron defeated the far-right candidate Marine Le Pen in May’s presidential election.

At the start of the year, political risks were considered the major hurdle facing the eurozone. There had been fears that radical changes in government could have seen more insular economic policies and further questions over the future of the euro itself.

“On the upside, the cyclical rebound could be stronger and more sustained in Europe, where political risk has diminished,” the IMF said in Monday’s report.

The lead eurozone economist at Oxford Economics, Ben May, thinks the IMF’s forecast may actually turn out to be too cautious. He’s predicting 2.2 percent growth as the region benefits from lower inflation, healthy global growth and a pick-up in business investment.

The IMF’s update came as a survey showed the eurozone economy slowed in July from a fast pace.

Financial information firm IHS Markit said Monday that its purchasing managers’ index for the region fell to a six-month low of 55.8 points in July from 56.3 the previous month.

The indicator still points to one of the strongest economic expansions in the past six years, with quarterly growth at a still-healthy 0.6 percent, down only slightly from the 0.7 percent signaled for the second quarter. Official second-quarter figures are due in early August.

Chris Williamson, the firm’s chief business economist, says it’s probably just a “speed bump,” with the economy “hitting bottlenecks due to the speed of the recent upturn.”

He noted that forward-looking indicators, such as new order inflows, suggest robust growth. As a result, job creation is “booming” as companies expand to meet demand.

The survey is likely to inform the ECB’s deliberations as it mulls when to start reining back its monetary stimulus. Last week, ECB President Mario Draghi sought to be neutral, worried that any indication of any change of course could cause the euro to surge. More clarity is expected at the next policy meeting on Sept. 7.

Much will depend on inflation. The chief purpose behind the ECB’s stimulus efforts, which has involved slashing interest rates and buying 60 billion euros ($69 billion) a month in bonds at least through the end of the year, is to get inflation up to its goal of just below 2 percent. In June, the annual rate of inflation was 1.3 percent.

Monday’s survey suggested that inflation pressures eased in July, which may reinforce Draghi’s belief that there isn’t “any convincing sign of a pickup in inflation.”
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