Recovery to withstand political concerns

Politics are in focus yet again, with the German and Austrian elections revealing reduced support for mainstream parties and the push for Catalan independence creating much uncertainty. But business and consumer confidence have been encouragingly resilient and we doubt that political problems will have a major impact on European growth in the near term. In fact, one consequence of the German election will be modest growth-boosting tax cuts. Even in the UK, the recent slowdown should abate as a Brexit deal takes shape in the coming months. Against this backdrop, central banks seem set to embark on policy normalisation. We expect the ECB to have ended its asset purchases by around September next year, while the Bank of England will raise interest rates by more than markets expect. A key exception will be Switzerland, where near-zero inflation and a highly valued currency will keep the SNB on hold.