Eurozone Economy Records Strongest Growth in a Decade -- Update

By FeaturesDow Jones Newswires

The eurozone economy outpaced its U.S. counterpart for the second straight year in 2017 as it recorded its strongest growth in a decade, aided by a revival in investment spending by French businesses.

The European Union's statistics agency Tuesday said gross domestic product -- the broadest measure of the goods and services produced by the eurozone's 19 member countries -- was 2.5% higher in 2017 than in 2016, the fastest growth rate since 2007.

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That was further evidence of a synchronized pickup around the world, with the U.S. and China having already reported accelerations in 2017, to 2.3% and 6.9% respectively.

The European Central Bank has already celebrated the year as having marked a transition from crisis "recovery" to a more normal "expansion." Business surveys suggest the economy has started 2018 on an even stronger note, but it faces a number of potential stumbling blocks, including the ECB's efforts to wind down crisis-era stimulus policies, as well as the possibility of U.S. measures designed to reduce its trade deficit with the currency area.

The eurozone's prospects for this and following years may rest on two large economies that have lagged behind since the start of the recovery in late 2013: France and Italy.

Figures also released Tuesday showed the French economy accelerated in 2017, growing by 1.9% to record its strongest year since 2011. That may mark the end of half a decade of French inertia that has kept unemployment close to 10% and held back the broader European recovery.

Firms and investors have applauded French President Emmanuel Macron's his first steps to cut red tape and taxes that economists have long blamed for the country's relative economic malaise.

Investment by nonfinancial companies rose 4.3% in 2017, the fastest increase in a decade.

The upswing is giving France greater clout on the European and global stage. At the World Economic Forum in Davos last week, Mr. Macron struck an uncharacteristically confident pose for a French leader, proclaiming "France is Back" and demanding business leaders and heads of state overhaul the rules of global trade.

His government plans more economic overhauls this year to remove barriers to growth for small French companies and help them compete in export markets.

"The message I wanted to convey here in Davos is very clear: it is only the beginning of the story," French finance minister Bruno Le Maire said in an interview with The Wall Street Journal.

At business travel agent Travel Planet, customers were managing their travel expenses from one day to the next before the vote, said chief executive Tristan Dessain-Gélinet. After Mr. Macron's election victory, he said, clients began reserving travel four to five months into the future, a rare level of commitment in the industry. By the end of 2017, revenues at his 100-strong company were up over 50% from 2016 at around EUR100 million.

"When people have come close to the abyss, they revise their way of seeing things," said Mr. Dessain-Gélinet.

The speed of Mr. Macron's decrees to loosen labor laws turbocharged confidence, companies say. In a booming construction sector, large firms switched from hiring equipment to investing in their own diggers and trucks, said the head of JCB France Françoise Rausch. The French unit of JCB expects to have slightly outpaced growth in its sector in France of around 19% to 23% in 2017.

"People think it's rational, but there is always a psychological and subjective side to investment which is based on a belief in the future," Ms. Rausch said.

The acceleration in France has helped offset cooling in Spain, the eurozone economy that has grown most rapidly over recent years. Figures also released Tuesday showed the eurozone's fourth largest member slowed slightly in 2017, growing by 3.1% in 2017 as against 3.3% in 2016.

Over the longer term, the eurozone faces a number of more fundamental challenges. Its population is aging and growing slowly, while almost a fifth of its young people are still without work. In a report last week, the IMF warned that was bad not just for economic growth, but for the political health of the currency area. Governments have large debts, and the repair of the banking system still has some way to go.

"Europe is doing very well economically," said Dutch finance minister Wopke Hoekstra in an interview with The Wall Street Journal. "There's a bit of a feeling that we've had a rough ride and now the sun is up again. The challenge is...to use the momentum we have now to continue with reforms because at some point in time the next crisis will come."

The eurozone's large trade surplus may also be a longer-term problem. Higher exports aided growth last year, and the eurozone's current account surplus -- or the excess of its earnings from the rest of the world over its payments -- rose to EUR386.1 billion in the 12 months through November from EUR375.1 billion in the same period a year earlier.

Its surplus in trade is attracting the attention of President Donald Trump, who threatened action to respond to what he said were "very unfair" trade policy toward the U.S.. If the U.S. were to implement trade restrictions against Europe that were "very much to their detriment," the eurozone's recovery could weaken.

Write to William Horobin at William.Horobin@wsj.com and Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

January 30, 2018 05:43 ET (10:43 GMT)

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