Eurozone economy on ‘modest’ growth path

The eurozone economy looks set for a prolonged period of modest growth and low inflation, according to a Reuters poll, with expectations from the start of the year that growth was about to accelerate having all but evaporated.

A sharp fall in global oil prices last year raised hopes of a boost to consumer spending which, coupled with the European Central Bank’s stimulus programme and a weaker currency, would accelerate the growth momentum seen in the first quarter.

However, almost half a year into the ECB’s €60bn a month bond buying scheme and with oil prices not far off January’s low levels, predictions for growth, inflation, factory output and unemployment are yet to change meaningfully. The poll of almost 70 economists, taken in the past week, showed GDP growth would languish between 0.3% and 0.5% each quarter from now until the end of 2016 in the eurozone and its largest economies — Germany, France and Italy. That is consistent with annual growth rates of 1.4% in 2015 and 1.7% next year for the eurozone and slightly higher at 1.8% and 1.9% respectively for Germany. The outlook is even weaker for France and Italy, the latter of which peeped out of recession at the start of the year to report tentative growth for the first time in three years.

“The euro area economy is still on track for a modest recovery in 2015,” wrote Philippe Gudin, head of European economics research at Barclays in a note. However, business confidence has been levelling off since the beginning of the year and we do not expect growth to accelerate further over the next two years, while inflation, although having bottomed, will rebound only gradually and is unlikely to approach the ECB’s 2% target anytime soon.”

The US economy, by contrast, is expected to expand 2.3% this year and 2.8% next, cementing predictions the Federal Reserve will soon raise interest rates in the world’s largest economy, most likely in September. At a time when emerging economies in Asia and Latin America are rapidly cooling, that leaves much of the responsibility for driving global growth to the US. In the short-term at least, prospects for the eurozone economy look slightly better with a deal now struck between Greece and its international creditors, led by Germany. Greek Prime Minister Alexis Tsipras yesterday managed to stem a rebellion in his own party and pass through parliament a second package of reforms necessary to begin talks on a third bailout programme worth €86bn.

When asked to rate how concerned they were that the wrangling over Greece had dulled the positive eurozone growth momentum, a majority of economists said they were ‘not concerned’. Inflation in the eurozone is expected to rise 0.4% this quarter and 0.8% next. While it is expected to accelerate further next year, the median consensus is for inflation to average just 1.5% even in 2017. In an indication of how weak expectations are, none in the sample of over 50 economists had an inflation forecast of 2% anywhere in the poll horizon.

Reuters