Europe: Political uncertainty threatens growth outlook - ANZ

European politics is approaching a crossroad as the collapse in support for the established parties, which built the EU, is intensifying, which may well be reflected in the 2019 European elections, with significant implications for Europe’s evolution, according to analysts at ANZ.

Key Quotes

“The failure of the coalition talks in Germany holds few implications for the short term growth outlook. But no clear leadership in Europe’s largest economy means progress towards deeper European integration will be delayed and some aspects could be derailed.”

“Progress in implementing structural reforms may also be curtailed by the fracturing political backdrop. That is bad news for medium to longer term growth prospects and would imply that interest rates could stay lower for longer.”

“The political climate also provides an exogenous headwind for the euro and a counterweight to the positive influence that strengthening domestic demand has on the single currency.”

“What we’re watching

• The Bank of Canada revised down its estimate of the global neutral rate this week, a common trend among central banks. How low will they go? 
• The inflation debate within the Fed remains divided. The market viewed comments from Fed Chair Yellen this week as dovish. She expressed some concern about the drift down in inflation expectations, potentially boosting the dove camp of Brainard et al., who are concerned about a structural downward shift in inflation expectations. 
• Global PMIs will be a key gauge of growth momentum as we head into the end of Q4. We will also get a real-time view of whether elevated US consumer confidence can turn into actual consumption during the Black Friday and Cyber Monday sales.”