Surprising upside in growth numbers

Given the latest data out of the Eurozone, we are raising our growth estimates for this year and next. But don’t expect the European Central Bank to jump the gun on tightening policy.
Group Research11 Aug 2017
Photo credit: AFP Photo

Advance growth numbers put the Eurozone 2Q17 GDP growth of 2.1% year-on-year (versus 1Q17’s 1.9%) ahead of the UK and a shade below the US. Given the string of strong numbers out of Germany, this 2Q17 pace might be revised up later this month. As it stands, 1H17 growth averaged 2.0% y-o-y, surpassing our expectations. The main surprise was the resilience in household consumption trends, which we expected would lose momentum. With global oil prices off highs and inflation easing to 1.3% in July from 1Q17’s 1.8%, purchasing power remains strong. Wage growth is subdued, but low borrowing costs and easing lending standards have supported lending growth. Thereby household debt levels have stopped falling and are stabilising at 58-59% of GDP, according to the Institute of International Finance.

At the same time, investment growth has also picked up steam, offsetting the slower support from government spending – the fiscal deficit narrowed to 1.3% of GDP in 1Q17 from 4Q16’s 1.5%. Higher export growth has been accompanied by firm imports, thereby narrowing the trade surplus, which is likely to see the net trade contribution to growth at neutral this year, compared to -0.2 percentage points in 2016.

Into 3Q17, purchasing managers’ indices have stabilised, core inflation has ticked up pointing to improved demand-led forces. Confidence indices remain buoyant, helped also by receding political risks and fewer euro-sceptic worries. Germany holds its national elections on 24 September and the ruling party is expected to maintain its strong hold after lead¬ing regional polls this year.

Given these dynamics, we raise our 2017 and 2018 growth estimates to 2.0% and 2.2% respectively (versus 1.7% and 1.8% previously). Upbeat growth momen¬tum has fed into policy normalisation expectations, but the European Central Bank will keep an eye on headline inflation that is still way below target. This will keep them from tightening policy levers prematurely, even as the pace of asset purchases slows down starting next year.

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