Middle East poses considerable political risks
Apart from North Korea, the Middle East poses considerable political risks,
which might even lead to renewed flight movements to Europe. Moreover, the
parliamentary elections in Italy, which need to be held by May 2018, harbour
additional political risks for the euro area. In Germany, the unexpected
difficulties in forming a government have increased political uncertainty.
The country may be in for another grand coalition that may hesitate to introduce
reforms and instead spend more money, or for an unstable minority
government, or early elections. This might even damage the reputation of
Germany as a business location. From an economic vantage point, the biggest
risk stems from the Chinese government’s ambitions to slow down the country’s
expansion.
In addition, more visible conflicts of interest in global trade might
result in increased protectionism. However, the biggest risks probably relate to
the global bond markets, not least because volatility was extremely low during
the past year. The ECB’s exit from its QE programme might trigger considerable
volatility, particularly if our concerns about a quicker than expected
normalisation of global inflation rates materialise
EU Forecast
euf:ba18h:96/nws-01