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European Economy

Euro-Zone Growth Pessimists Will Be Proved Wrong (Again)

Economists are still playing catch-up with the bloc's improved economic outlook.

Economists have spent the past six months upgrading their forecasts for how fast the euro zone economy can grow this year. Even so, they are gloomier than they should be.

For this year, economists surveyed by Bloomberg expect euro zone growth to reach 1.6 percent, a consensus that's improved three times in the past six months. The average forecast for next year, however, has flatlined for most of that period, and was only recently nudged higher:

Playing Catch-Up

How the consensus forecasts of economists for annual euro zone growth have developed over time

Source: ECFC function on the Bloomberg terminal

We've seen this movie before. Last year, the average forecast of economists was for the euro zone to post a growth rate of a bit more than 1.5 percent; instead, gross domestic product expanded by 1.7 percent. The economy displayed a similar out-performance in 2015, with an average forecast for the year of 1.4 percent outpaced by a growth rate of 2 percent.

So why does the consensus remain so pessimistic? Europe's political backdrop is mostly to blame for making things seem bleaker than they really are. In 2015, the prospect of Greece tumbling out of the euro sparked jitters that spread to the bond markets of Italy and Spain. Last year, Britain's vote to leave the European Union undermined confidence in the region's economic prospects, while political rumblings in Italy cost Matteo Renzi his job as prime minister.

This year, the outside chance that Marine Le Pen might win the French presidential election and make good on her threat to take one of the euro's founding members out of the single-currency project has cast a pall over the region.

Ignore the politics and focus on the data, however, and the strength of the underlying economy in the euro zone comes into focus. German business confidence is at its highest level since mid-2011, accord to the Munich-based Ifo institute's latest business climate index. The various Purchasing Managers Index surveys compiled by Markit Economics for the euro region as a whole also suggest an improving outlook, with the composite index at a near six-year high in March:

Heading Higher

Purchasing Manager Index surveys for the euro zone

Source: Markit Economics via Bloomberg

Note: readings above 50 signal expansion

Currency traders seem to be shifting their bets in light of the improved euro zone outlook. Traders are the least bearish they've been on the euro's prospects against the dollar for the past three years, according to figures compiled by the Commodity Futures Trading Commission:

Source: Bloomberg

And investors are starting to take a liking again to European equities, maybe realizing they were overly pessimistic about Europe (and overly optimistic about Donald Trump and the so-called reflation trade). In the past month, the Stoxx Europe 600 index has outperformed the Standard & Poor's 500 by more than 3 percent on a total return basis in local currencies.

So what will it take for economists to revise their 2017 and 2018 forecasts for the euro zone economy higher? Getting through the next election cycle unscathed should help. The strong weekend showing by Angela Merkel's Christian Democratic Union in local elections will be further reassurance. France's two-stage election, with the first round scheduled for April 23 and the second vote to be held on May 7, remains an obstacle. But provided the opinion polls are correct in putting Le Pen's support in the second ballot at about 40 percent, behind Emmanuel Macron with about 60 percent, the dissipation of "Frexit" worries could be the trigger for a renewed bout of forecast revisions.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Mark Gilbert at magilbert@bloomberg.net

    To contact the editor responsible for this story:
    Therese Raphael at traphael4@bloomberg.net

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