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Euro Update: What to Potentially Expect in 2017

The United States’ recovery following the recession may feel slow, but it has outperformed other major markets worldwide.

Europe, home to many developed nations, has seen dismal growth that is not expected to improve anytime soon. The Conference Board, a global, independent business membership and research association, projects only 1.4 percent growth in 2017, down from its 1.7 percent rate in 2016.

Governments in developed countries are in a state of transformation and reform at the will of working-class voters. Dissatisfaction in Great Britain led to a vote to leave the European Union last summer, followed by a “drain-the-swamp” sentiment in the U.S. presidential election and finally, at the end of the year, Italy voted against a referendum for constitutional reforms that may have helped its failing banking system.

As a general rule in any country, a state of uncertainty and lack of confidence — whether caused by the economy, financial markets, civil unrest or political upheaval — tends to quash growth. Companies may put expansion and investment plans on hold, which further stunts job and wage growth. Unfortunately, the longer this state of uncertainty persists, the more profound impact it can have on an economy.

There are several key issues that will likely impact European countries this year. One is the voter movement against trade deals. Global free trade may offer lower-cost labor options and lower consumer prices, but at the price of job losses to workers in developed nations. The European zone in particular has enjoyed a prolonged period of open borders and a positive trade balance marked by more exports than imports. However, the challenge moving forward will be how to stimulate growth through globalization without further disenfranchising domestic populations.

The first big economic test for incoming politicians may come in March, when Britain begins its extrication from the EU. This will be accompanied by a series of political elections which could further serve to destabilize the region, including the Netherlands (March), France (May) and Germany (September).

The euro is losing value compared to the U.S. dollar, which one analyst believes could help Europe’s exports become more competitive and stimulate growth in the region. However, rising interest rates in the U.S. could lead to instability in emerging markets and a drop off in overall global demand.