European Economic Growth to Continue at a Moderate Pace, Inflation to Pick-Up
- European Commission forecasts slightly lower growth in 2017.
- Growth supported by private consumption.
- Risks “are clearly titled to the downside”; Italian constitutional referendum on December 4; Brexit case hearing in UK Supreme Court from December 5-8.
The latest European Commission (EC) economic forecasts points to continued growth in Europe but with downside risks. The Commission sees euro area GDP growth at +1.7% in 2016 and +1.5% in 2017 compared to Spring forecasts of +1.6% in 2016 and +1.8% in 2017. Economic growth is expected to continue at a moderate pace driven by private consumption and supportive borrowing costs.
The report notes that ‘Private consumption is set to remain the primary engine of growth through to 2018, supported by expectations for employment to continue growing and wages to pick up slightly. Borrowing costs remain supportive to growth due to exceptionally accommodative monetary policy’. And these ultra-low borrowing costs may continue well into 2017 with the European Central Bank looking at extending its EUR80 billion a month bond buying programme.
ECB President Mario Draghi recently hinted that the central bank may announce an extension of the quantitative easing programme at the next policy meeting on December 8. This move could increase pressure on the single currency, especially against the US dollar if the Federal Reserve hikes rates at its December meeting.
Chart 1: EUR/USD Daily Chart (April to November 2016)
The report also sees inflation picking up as the past effects of low oil prices continue to wear off. In the euro area inflation is expected to rise from 0.3% in 2016 to 1.4% in both 2017 and 2018. In the EU, inflation is expected to rise further from 0.3% this year to 1.6% and 1.7% in the next two years.
While steady growth and an uptick in inflation would please policy makers, the EC noted that risks have heightened since their last forecast. “Risks to the forecast have risen in recent months and are clearly tilted to the downside, including as a result of the UK ‘leave' vote, which has raised uncertainty and can be seen as an indicator of heightened policy risks in the current volatile political environment. External risks, such as uncertain economic trends in China and the risk of aggravating geopolitical conflicts have also risen,” the forecast warned.
Note: The EC August forecast was written before the results of the US Presidential election were known.
--- Written by Nick Cawley, DailyFX Research