Outlook positive, but risks are rising

Most European economies have experienced a slowdown since last year, but growth is still strong by historic standards and prospects are fairly bright. Admittedly, trade protection poses a serious threat, particularly to the most open economies like Germany, the Netherlands and Switzerland. And renewed damaging turmoil in Italy cannot be ruled out. But for now, a combination of high business and consumer confidence, falling unemployment, gently rising wage growth and supportive financing conditions should see domestic spending fare well on the whole. The central banks all have their eyes on policy normalisation, but the pace will be mixed given varying degrees of economic spare capacity. The Bank of England is leading the way and we see it raising interest rates twice more this year, despite uncertainties relating to Brexit. But while the ECB is set to end its asset purchases, it is unlikely to start raising interest rates for over a year and even then only gradually. Meanwhile, the Swiss National Bank will barely alter its ultra-supportive policy as inflation expectations remain weak.