Euro area economy likely to grow strongly in 2018, core inflation to rise marginally – DNB Bank

The strength of the euro area growth traction has caught several by surprise in 2017. Positivity amongst households and enterprises and very easy financial conditions has added to the strong growth in consumption and investments. Export growth has also been solid, a development that is mostly because of solid demand from China. On a year-on-year basis, the economic growth has picked up from 2.1 percent in the first quarter to 2.6 percent in the third quarter.

The jobless rate has dropped to 8.9 percent, the lowest level since the beginning of 2009. Indicators point to continued strength in the fourth quarter. According to a DNB research report, the growth is likely to come in at 2.3 percent in the whole of 2017.

“We expect 2018 to be an equally strong year, with GDP growth at 2.3 percent. We expect to see continued strength in consumption and investments”, stated DNB Bank.

However, external demand is expected to dampen growth in the second half of the year as the government-induced slowdown dampens Chinese demand.

Meanwhile, core inflation continues to be disappointingly low. This is mainly because of sluggish wage growth. National and international factors are expected to continue to be a drag on wage and inflation going forward. Even if jobless rate is expected to decline further to 8.2 percent in the fourth quarter of next year, only a modest rebound in wages is expected to 2.2 percent in 2018. Core inflation is likely to rise slightly to 1.3 percent from 1.1 percent, noted DNB Bank.

Therefore, the European Central Bank is expected to continue to be prudent and patient, but the end of unconventional policy is in sight.

“We expect the deposit rate to be lifted by 15 basis points to -0.25% in Q2 2019. In Q3 2019 we expect the refi and deposit rate to be lifted simultaneously, to 0 and 0.25%, respectively”, added DNB Bank.

At 14:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at 47.7611, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 33.2164. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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