Euro area economy likely to continue expanding at moderate pace in H2

The euro area economy is likely to keep growing at a moderate pace in the second half of 2016. The currency bloc’s GDP grew 0.3 percent in sequential terms in the second quarter, a slowdown from first quarter’s solid expansion of 0.6 percent quarter-on-quarter. The moderate pace of growth in the second quarter is likely a more accurate sign of underlying trends, said Lloyds Bank in a research note.

Euro area’s economic growth outlook for the second half of 2016 and beyond is being shadowed by uncertainties regarding the possible effect of the Brexit vote and the current worries about high levels of non-performing loans in parts of the euro area banking sector. However, the recent survey indicators have been comforting. The indicators imply that any downward movement in the economic growth might be restricted, at least in the short term, according to Lloyds Bank. Rebounding labor market conditions are expected to continue underpinning domestic demand.

Jobless rate in the euro zone continues to be at a high level of 10.1 percent; however, it is at a five-year low and is on course to decline further. Demand is also being supported by easier credit conditions and low inflation. Overall, the current moderate pace of growth is expected to continue in the second half of 2016, with GDP likely to grow 1.6 percent for the whole of 2016.

“We expect the growth rate for 2017 to be slightly lower at 1.4 percent, though this is above the current consensus forecast of 1.2 percent (on Bloomberg)”, added Lloyds Bank.

Meanwhile, the annual headline CPI inflation accelerated slightly to 0.2 percent in July from June’s 0.1 percent. However, it continues to be lower than the central bank’s target of ‘close to but below 2 percent’. Declining energy prices alone cannot be attributed to the subdued headline inflation. Core inflation, which strips food and energy, remained same at 0.9 percent year-on-year last month.

Energy price base effects are likely to result in a clearer uptrend in headline inflation in months ahead, possibly towards 1 percent by the end of 2016. Headline inflation is expected to move towards the target rate of 2 percent in the quarters ahead; however, progress is expected to be gradual, given the economy’s significant spare capacity.

“Overall, we look for headline inflation to average 0.3 percent this year, rising to 1.5 percent in 2017, conditional on ongoing monetary policy accommodation”, stated Lloyds Bank.