Euro-zone back in the spotlight in 2017

The European economies have continued to fare relatively well, with euro-zone growth in particular supported by a weaker currency and low inflation. However, a temporary surge in inflation this year coupled with persistently weak wage growth looks set to dampen the consumer recovery. Meanwhile, domestic spending will also suffer from political uncertainty in the run-up to various elections, even assuming that populist parties do not come to power. We see bond yields in some countries rising sharply as financial markets price in a greater risk of euro-zone exit. The one upside for the single currency area is that the euro is likely to depreciate further. But, with the exception of the UK, other European economies will suffer from an associated strengthening of their currencies.