A vintage year, but is the best yet to come?

The euro-zone economy performed better in 2017 than we and most forecasters had anticipated at the year’s outset. Investment growth picked up despite intense political uncertainty. And while a rise in inflation dampened households’ real incomes growth as we had expected, this effect was offset by a continued pick-up in employment growth. We were right to revise up our forecast in the spring. And there are good reasons for optimism about 2018. While the ECB will scale back its asset purchases, the economic upturn now looks more sustainable: the labour market recovery is spreading and banks are in better health. We expect GDP to rise by about 2.3% again, which is stronger than the consensus forecast.But there are risks to this upbeat scenario. The biggest is probably that the ECB either raises rates too soon or communicates its intentions poorly, causing the euro to appreciate and/or bond yields to rise sharply.