EC’s optimistic forecasts underestimate key risks

In its latest economic forecasts published last week, the European Commission (EC) provided a fairly upbeat outlook for the euro-zone economy, expecting it to sustain its current pace of growth in 2017 and 2018. However, we think that the EC is being too optimistic. In our view, a slowdown is much more likely, as rising inflation, weak wage growth, political uncertainty ahead of key elections, and renewed worries about Greece all take their toll on consumer spending and investment. This week we will get a sense of how much political worries are hitting business activity and consumer sentiment in the region, with the Composite PMIs, German Ifo and euro-zone flash consumer confidence all set to fall. Meanwhile, we doubt that Monday’s Eurogroup meeting will break the current impasse over the Greek bailout.