“Changes in fiscal policy or other economic policies could potentially affect the economic outlook…”


Outlook EU countries – Germany and Italy

The European Commission has projected that the euro-area GDP growth will slow to 1.6 percent this year from 1.7 percent in 2016. The forecasts shed light on the uncertainties brought around by Brexit negotiations and Trump’s presidency. These uncertainties can also have an impact on the ECB policies. Although officials have agreed to reduce the pace of government-bond buying to EUR 60 billion from April, President Mario Draghi has upheld a pledge that stimulus can be increased in the case the outlook worsens.

The growth of Italy and Germany fell short of forecasts. According to the nations statistics office gross domestic product rose by 0.4 percent in the three month through December, while Italy’s GDP increased by 0.2 percent and lagged growth compared with the other 19 nations within the EU. Germany’s GDP increased by a seasonally adjusted 0.4 percent in the three months through December, which was led by domestic demand. Government spending has increased noticeably and households increased consumption slightly. Investment has increased positively bolstered by building, while imports have exceeded exports. The outlook for Germany is still favourable despite risks are on the increase. Unemployment is at its lowest level since reunification and business sentiment are at level close to those of the beginning of 2014.

European Stocks

Higher raw material prices and forecasts of stronger inflation resulted in a rally that saw European stocks to advance to their highest level since December 2015. The Stoxx Europe 600 index closed 0.8 percent higher, with mining sector hitting its highest level since 2014 as metal prices increase for the second day. Also, European equity gauge has increased for a fifth day, with Asia and US markets also on the rise. Eighteen of 19 sectors advanced in the Stoxx Europe 600 Index, resulting from a 2.4 per cent jump in the basic- resources sector. Stada Arzneimittel AG increased by 13% after the German drugmaker said it received two takeover offers. Plans of cost cutting of more than $1 billion led to Royal Bank of Scotland share price to rise by 2.5 percent.


Michael Flynn resigned from national security adviser of President Donald Trump. The news came after the Justice Department had warned the White House amid concerns of security adviser’s contacts with the Russian ambassador to the US. This creates a difficult position in the implementation of certain policies.


Since the end of 2007 to 2009 recession, the FED raised rates once in December 2015 and in December 2016. On Tuesday, Fed Chair Janet Yellen has appeared in Congress for the first time since Republicans took control of the White House. Yellen said that the Federal Reserve will likely need to raise interest rates at an upcoming meeting. She did not specify when the rate hike will take place. Delaying the rate increases could leave the Fed’s policymaking committee behind the curve and would then lead to hike rates quickly, which could cause a recession. She also said that, “changes in fiscal policy or other economic policies could potentially affect the economic outlook”. She also added that it is too early to know what policy changes will be put in place or what would be the economic effects.

Yellen also mentioned that Fed policymakers will be discussing in the coming months how the central bank will be reducing the size of the bond portfolio which increased during the financial crisis.

Upon her testimony the US Treasury securities have sold off, resulting in the yield on the government 10 year note to increase from 2.43% to 2.48%.


The Lower house of the UK Parliament voted favourably to give Prime Minister Theresa May the power to trigger Article 50 of the Lisbon Treaty that would mark the beginning of the two-year process to allow the country to leave the EU. She promised Lawmakers an early vote on the final agreement.


There are two views in addressing the situation of Greece. According to the IMF “significant debt relief” is needed while the euro zone institutions insist on a primary budget surplus of 3.5 percent of gross domestic product and no further relief. On 20 February a meeting of euro region finance ministers shall take place in Brussels, however the biggest deadline is in July when for Greece the monthly debt repayments shall increase to about 8 billion euros. The German Finance Minister is adamant that additional debt relief should not be an option. The IMF is talking about extending the repayment terms, rather than an outright debt haircut where principal payment is reduced.

The crisis in Greece is still on and the figures reflect all this where gross domestic product shrank by 0.4 percent in the fourth quarter of 2016 compared with the 0.4 percent expected by economists.

Antonella Mercieca

Client Relationship Manager




February 17th, 2017

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