Eurozone: a growth which will remain very dependent on real estate, a potential source of instability
The growth of the Eurozone has significantly accelerated, reaching an average of 2.3% during the first three trimesters of 2017, compared to 1.8% in 2016. The momentum behind its growth can be explained by the real estate market’s recovery and by the significant increase in exports. The construction sector alone is responsible for over 40% of the acceleration in the Eurozone’s GDP growth. In the upcoming quarters, housing demand and property prices should continue to increase within the Eurozone and support GDP growth, but will also be a source of financial instability.
Central banks will dictate the balance of power
Central banks have once again revised their inflation forecast downwards. In this context, equilibrium interest rates are also lower than those before the crisis. The equilibrium interest rates are also lower as a result of an increasing propensity to save and a decline in the propensity to invest.
This means that the slightest rise in key interest rates could be enough to “normalise” monetary policy, that is, to bring the interest rate closer to its natural value. As a result, and despite the reduction in the Federal Reserve's balance sheet, interest rates should only rise gradually.
United States’ growth could overtake China’s in 2018
U.S growth will overtake Chinese growth; although the Asian region has become more independent, which has had the effect of boosting its own growth drivers, it still depends on the United States. Tax cuts in the United States, which are set to take place mid-2018, could support American household consumption as well as global imports. According to calculations carried out by Edmond de Rothschild in the US, a reduction in taxes for households could save them 138 billion dollars in 2018. However, the cancelation of certain tax credits and the basic deduction for income tax will cost 121 billion dollars. Therefore, the impact on household consumption will only be a matter of 0.1 percent. As long as salaries remain constrained by productivity, demand will progress slowly and forecasts for activity acceleration will remain limited.
What solutions for a sustainable growth?
Mathilde Lemoine advocates the creation of investment policies in the sectors of the future, most importantly that of education, to encourage the spread of innovations and thus an improvement in productivity, particularly in the service industry. This will lead to an increase in salaries and will thereby encourage household consumption. Meanwhile, investors should keep in mind that the price of securities, set by the central banks, remains artificial.
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