Euro-zone growth to beat consensus this year

Last week brought more evidence that the euro-zone economy has continued to perform very well and we have decided to upgrade our forecasts for the region significantly. Indeed, inflation has been more subdued than we had assumed. In turn, this should mean that the slowdown in household spending growth is not too sharp. What’s more, there has been no discernible economic impact from political uncertainty, and financial markets have remained buoyant. Accordingly, we now expect euro-zone GDP to rise by around 2% this year and 1.7% in 2018. This rests on three key assumptions: that inflation will not rise much further; that forthcoming elections will have benign outcomes; and that the ECB will maintain its dovish stance. Nevertheless, we are still concerned about the euro-zone’s longer-term prospects. Indeed, there seems to be an ever-decreasing chance of the fiscal union that we think is needed to ensure growth in the long term. Energy effects have been less pronounced than we had expected. This chart shows that energy inflation has not risen by as much as trends in oil prices would have implied in recent months.