Surprising upside in growth numbers
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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