Outlook has brightened despite political risk

The euro-zone has continued to perform very well and we now expect growth to be stronger than the consensus forecast this year and next. Inflation has been lower than we had assumed, meaning that household spending growth should not slow too sharply. Meanwhile, business and consumer sentiment have been resilient to political uncertainty and we expect this to continue, albeit with downside risks related to shock electoral outcomes. The UK should continue to weather its own political turmoil while the particularly strong performance of the Swiss and Nordic economies is likely to see their currencies strengthen further. We expect the first interest rate hikes to come in Sweden later this year, followed by the UK in 2018. But the European Central Bank will lag behind as remaining spare capacity in the labour market keeps euro-zone inflation pressures subdued.