Investment Desk Bulletin

14 February 2017

Europe - Grappling with Politics and UK - Strong 2016:Tough act to follow

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By Rabbani Wahhab & Craig Shute

In this week’s IDB, we firstly take a look at the Eurozone and how political hurdles are affecting the economy, with particular focus on Italy. In the second half of the presentation we consider UK growth; the surprising performance in 2016 and whether this momentum can be maintained in 2017.

With a busy political schedule on Europe’s horizon, 2017 is looking challenging for the Eurozone. Italy in particular is experiencing a high level of Euro-scepticism, resulting in a fragmented political spectrum. The European Central Bank (ECB) has finally engineered increased lending, however the pace may be starting to wane. Quantitative Easing (QE) may be tapered, but help will be needed from the ECB for a long time to come. It is expected that government bond yields may rise a little, providing support for the Euro.

GDP in the UK grew by 0.6% in Q4 2016, amounting to a surprisingly stable 2% for the year. The underlying factors that helped the UK economy in the second half of 2016 included a strong labour market, positive real earnings growth, accommodative consumer credit and a reduction in household saving.

Looking ahead at 2017, the Bank of England (BoE) interest rate policy remains accommodative and supportive. UK Equities are expected to benefit from the constructive growth momentum, although this may flag if the boost from a weaker currency reverses. The Brexit outcome will be watched closely; Article 50 will be triggered in March, with negotiations to follow, leading to a 2-year exit timetable.