Eurozone Economic Confidence Surges to Decade High

Even as Catalonia serves a reminder that political risks remain, the eurozone’s year of living dangerously is turning out well for the economy.

On track for the strongest expansion in a decade and with consumer and business confidence at the highest since before the financial crisis, the 19-nation currency bloc is emerging as fertile ground for dealmakers, investors and executives, Bloomberg reported.

 “The wind is well and truly back in the sails of Europe,” said Simon Wells, chief European economist at HSBC Holdings Plc. “The question for investors I suppose is: can this continue?”

The upbeat economic outcome for 2017 wasn’t at all certain at the start of the year, when the shockwaves from votes for Brexit and (US President) Donald Trump were prompting warnings that the eurozone would be the next to witness a populist surge that could splinter the currency bloc.

Catalonia’s illegal independence referendum on Sunday, which could see separatists make a unilateral declaration as soon as this week to split the region from Spain, showed that the risks are far from over.

Yet they have abated. German Chancellor Angela Merkel has to deal with a rise in support for the far right but she’s still readying for a fourth term in power. At the same time, newly-elected French President Emmanuel Macron is pushing a reform program and fellow European Union leaders are planning deeper integration.

“The period of confusion may cause a dent in Spanish economic sentiment,” said Holger Schmieding, chief economist at Berenberg in London. “For the eurozone as a whole, the possible Catalan impact will probably be too small to make a noticeable difference.”’

The European Central Bank forecasts an economic expansion of 2.2% this year, enough to persuade President Mario Draghi to consider slowing the institution’s extraordinary monetary stimulus. The governing council is slated to take that decision as soon as next month.

Eurozone unemployment data on Monday will probably show a decline to 9% in August—the lowest level since early 2009 though still more than twice as high as the UK or US. A purchasing managers survey the same day should show manufacturing activity at the strongest in more than six years and economic confidence is at a decade high.

Mergers & Acquisitions

Investors have responded by pushing the Stoxx Europe 600 up more than 7% this year, headed for the strongest gain since 2013. European takeovers have jumped 41% to $526 billion, offsetting a slowdown in US deals, according to data compiled by Bloomberg.

Consumer transactions—such as French lensmaker Essilor International SA’s purchase of Luxottica Group SpA, the producer of Ray-Ban sunglasses—are leading the increase, reflecting growing optimism that job creation will boost household demand.

Confidence is rising but politics could still get in the way. Italians will vote to chose their parliament next year, with the euro-skeptic Five Star Movement set to make a strong showing. Merkel may have won the German election but her party still had its lowest share of the vote since 1949 as the far-right Alternative for Germany made gains.

That might throw a spanner in the works for Macron’s vision for overhauling the world’s largest trading bloc, where Germany’s cooperation—from setting up a common eurozone budget to potential harmonization of corporate taxes—would be essential.

Euro Slides

The euro got knocked Monday, falling 0.7% to $1.174, as more than 90% of Catalan voters chose independence from Spain amid clashes with riot police. Markets also took a hit after the referendum dubbed illegal by Spain, with the benchmark Ibex 35 Index down 1.2% and government debt suffering as well, Seeking Alpha reported.

"The extraordinary recovery of the Spanish economy could be hindered," warned analysts at ING, as the country sinks into its deepest constitutional crisis in decades.

HSBC estimates for every 10% jump in the trade-weighted euro, exports fall by 5%, and says net trade is going to be a drag on growth.

Bloomberg Intelligence predicts the eurozone expansion will slow slightly in the third quarter and decelerate further into the end of the year as the economy approaches its potential, according to BI economist Maxime Sbaihi. The ECB itself forecasts a slowdown to 1.8% in 2018 and 1.7% in 2019.