Euro area growth outlook weak on external factors, heightened uncertainty headwinds to business investments

Businesses in the euro area are likely to be wary regarding initiating new investments due to weakness in global growth, financial turmoil and moderate growth in investments on risks of Brexit. These doubts will dominate the help to investments from lower producer prices, improved bank lending and solid domestic demand as businesses usually brake when there is certain amount of uncertainty.

Meanwhile, the currency bloc is expected to witness weaker export growth as manufacturing sector around the world is still trying to recover with both US ISM and China's PMI's below 50. Moreover, exporters are facing headwind from the appreciated EUR. The euro area is likely to have lower average export growth in the longer-term due to the shift of China's economy from export-led to more service sector driven growth.

Euro area's private consumption is expected to remain strong and continue to be the main recovery driver of growth. Growth in private consumption is likely to be around pre-crisis levels with the help of persistently low oil price, along with significant progress in the labor market and high pent-up demand. The domestic-driven economic rebound is expected to be supported by cheaper bank lending to the private sector. The lending impulses indicate towards the ongoing recovery.

Fiscal headwinds in the euro area continue to go away. The fiscal space in certain euro nations are likely to result in small tailwind to the GDP growth in 2016. The euro area economic growth can benefit in coming years from the heightened focus on the requirement for fiscal stimulus instead of using only monetary policy.

"We have revised our euro area GDP growth forecast for 2016 considerably lower from 1.8% to 1.5% (consensus 1.6%)", says Danske Bank.

The downwardly revision is mainly because of external factors that increase uncertainty and are therefore headwinds to business investments.  They also keep export growth subdued.

"We still look for stronger growth of 1.8% in 2017 (consensus 1.7%). Most of the current uncertainties should fade and hence support an investment-led re-acceleration in activity", says Danske Bank.