Upside risks predominate

The economic upswing in the eurozone continues to firm up: In May the composite purchasing managers’ index for industry and services remained unchanged on the previous month at a six-year high of 56.8 points. Whereas economic momentum in Germany and France picked up appreciably, the pace of growth outside the two eurozone heavyweights eased somewhat but was still close to its ten-year high. Particularly encouraging is the fact that the assessment of job growth in April was the most upbeat for almost ten years. The business surveys signal that, after the strong start to 2017, the solid growth momentum has not slowed. On the contrary: With major political risks having been successfully circumnavigated in recent months, domestic demand – especially investment – is likely to move up a gear as uncertainty fades. Exports, on the other hand, are likely to be buoyed by healthy global economic growth. Although we are sticking for now with our forecast of 1.7% growth in the eurozone this year, the upside risks are increasingly gaining the upper hand.

In Germany the latest business surveys suggest that the economy is well on course for a boom. The ifo business climate index climbed in May from 113.1 to 114.6 points, thus reaching its highest level since 1991. Businesses corrected  their view of both the current situation and expectations up sharply, with the assessment of the current situation particularly upbeat. Of late the construction sector and manufacturing have been providing a particularly strong push. The purchasing managers’ index for Germany is similarly euphoric: In May the composite index for industry and services rose from 56.7 to 57.3 points. We are sticking for now with our forecast of an average increase in real gross domestic product of 1.7% in 2017, but should the export engine continue to hum (+6.6% y/y in Q1 2017), growth could come in even higher.

The French purchasing managers’ index for industry and services rose strongly again in May from 56.6 to 57.6 points, reaching its highest level for six years. This puts the composite index marginally above Germany’s for the second month in a row. Above all the PMI for the services sector improved markedly and, at 58.0 points after 56.7 in the preceding month, reached a new six-year high. By contrast, the index for the industrial sector slipped slightly by 0.3 points to 55.8. With the French economy having long seemed to be stuck in the doldrums and growth in the last three years having lagged well behind that in the eurozone, we now expect momentum to accelerate. With Macron’s election victory the risk of Frexit has been banished and the reform prospects for the French economy are the rosiest they have been for years. We have therefore nudged up our growth forecast for this year slightly to 1.5%.

Katharina Utermöhl

Phone +49 69 24431 3790