Low interest rates, new fiscal rules and a number of reforms have lifted growth in European countries to 2 per cent from 1 per cent over the past three years.
“Business conditions and consumer surveys remain around record highs, which is unlikely to remain at current levels because it is unsustainable,” says AMP Capital economist Diana Mousina.
“Although GDP growth and earnings momentum has rebounded, there are question marks as to whether this growth will be sustained.”
However, a number of issues are holding back growth in the eurozone, with Italy and France’s GDP lagging behind Germany, Spain and the Netherlands, which together accounted for 75 per cent of Europe’s overall growth.
Low inflation was also an issue in the eurozone, being driven by “spare capacity, low wages inflation, poor productivity growth and technological changes limiting price rises”, the report said.
High rates of unemployment was also flagged as hindering growth, despite the drop in recent years.
“The unemployment rate is sitting at 9.1 per cent, which has been decreasing over the past few years and is now below the long-run average,” the report said.
“But, it still has some room to decline further before it reaches the long-run natural rate of unemployment (around 8.5 per cent).”
“Sluggish business investment” has not assisted growth, with businesses hesitant to invest before detecting stronger consumer sentiment, and neither has the “currently elevated” euro, which “could hinder export growth” with US and China, Europe’s two largest exporting partners.
Additionally, the report indicated the ECB would not hike interest rates in the near future and flagged the upcoming Italian general election as an event that would represent risk for investors.
Regardless of the election results, an ‘Italian Euro Exit’ was unlikely, “however, this won’t stop markets from fretting about a Euro break-up, which would hit European equities and the euro”, the report said.
