GDP growth in the first half of 2016 was on average 0.4% quarter-on-quarter. Growth has been driven by consumption, business investment and, more recently, by public expenditures (chart 1). But after the result of the referendum of 24th June and the movements on the European financial markets, many feared the Euro zone would falter.

But, four months later, it appears that the Euro-zone economy is more than resilient. The economic sentiment index continues to point to around 2% GDP growth (chart 2). At 53.3 in October, the composite PMI is also higher than its Q3 level. In Germany, at the turn of the fourth quarter, the IFO index rose significantly to reach its highest level since April 2014. Moreover, it is the business expectations component that has drawn the whole index up … meaning that German firms are even more positive for the next 6 months.

These positive developments translate into higher employment and stronger business investments (charts 3 and 4). Therefore, up to now, we see no reason why activity should slow down or derail. All in all, we expect growth to rise by 1.7 % in 2016 and at nearly the same rate in 2017.

Of course, there are downside as well as upside risks. One downside risk is related to the numerous political rendezvous on the European agenda between now and the end of 2017: the Italian constitutional referendum, elections in the Netherlands, France and Germany as well as the possible triggering of Article 50 by the United Kingdom. An upside risk would be that European governments, acknowledging that the ECB policy has reached its limits, decide on some easing in their fiscal policies. Indeed, in 2017, if nothing is changed, fiscal stimulation will be close to nil.






Macro
News

Read all articles