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Which Industries will drive European Growth in 2018?

12 December 2017, 18:00 CET

The EU area looks set to record its fastest growth in a decade in 2017 and indications are that the recovery will continue into 2018. The IMF has also raised its forecast for global growth for 2017 and 2018. But which sectors within Europe will actually create that growth?

Euro area Growth for 2017 is on track to reach 2.2%, well ahead of the 1.7% forecasts from less than a year ago. Policy makers in Brussels are now forecasting growth of 2.1% in 2018 and 1.9% in 2019. But that growth is unlikely to be broad-based. While some sectors may record levels of growth, others will struggle. The big issue in Europe will be the strong Euro which will have an impact on corporates, particularly those that export from Europe.

Coins

If the oil price keeps rising, a big chunk of 2018's growth may well come from the petrochemical giants BP and Royal Dutch Shell. They would be the leaders in nominal terms, but the higher margins would flow through the value chain. With global growth picking up, oil demand is increasing and that should translate to continued price appreciation.

In a tough environment for exporters and manufacturers, industries with a high ROI (return on investment) will be the highest growth areas in percentage terms. Online gambling is a booming industry right now, and 2017 has seen several new players like OmniaCasino enter the market. Online casinos have managed to capitalise on almost every advantage web-based businesses have – including low overheads, access to larger markets and 24/7 operations. Similar industries will continue to see strong growth too.

Other high ROI industries are the capital-light services sector – media, legal, accounting and other consulting businesses. While these types of businesses are usually not publicly listed, they make up a big part of developed economies and will be a growth driver in 2018.

The global start-up and venture capital scene are still buoyant, and as long as the capital continues to flow, related industries will benefit. Despite many start-ups being far from profitable, the investment flowing into those companies will benefit the legal, advertising and media industry.

Electronics

While exporters are likely to have a tough time, the retail industry may actually have a better year. Apart from benefiting from a stronger Euro, there are reasons to believe the retail sector may bounce back from the terrible year it's had in 2017. Around the world, it has dawned on investors that nearly all the growth in retail is going to online retailers, like Amazon. But, while the growth is accruing to online retailers, online commerce still only accounts for fraction of total retail spend. And, retailers are being forced to adapt, which means those that don't will disappear, and those that do will thrive.

Amongst other sectors, the real estate sector may be a little overheated and developers are now struggling to generate returns. However, economic growth should still filter through to the construction and related industries. The Financial services sector is less predictable. It should have a good year, as long as global equity market volatility doesn't pick up too much. Financial services will probably be a modest contributor but are unlikely to drive regional growth.

Finally, nothing is guaranteed, and there are potential risks on the horizon. The political risk that many feared at the beginning of the year may have faded, but could still return. There are also larger global risks: various geopolitical issues and risk related to overvalued US equity markets. These risks are relatively remote, but if they return they will be a major test for the robustness of the economy.

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