Euro area’s economic sentiment surprisingly resilient to Brexit vote; economy likely to grow 1.5 pct this year

Euro area’s August PMI prints were little changed as compared to July’s level. Only the manufacturing PMI came in lower than prior to the Brexit vote in June. The composite PMI new orders index continues to be quite stable despite the Brexit vote. At present, it indicates towards a slightly higher GDP growth as compared with the second quarter’s sequential growth rate of 0.3 percent.

The economic sentiment has been unexpectedly resilient to the Brexit vote, noted Danske Bank in a research report. Earlier business sentiment was expected to have been impacted severely that would lead to lower investments; however, looking at the figures, the possibility of  near term recession in the euro area is unlikely now, stated Danske Bank.

“We now expect GDP growth of 1.5 percent in 2016 and 1.0 percent in 2017, up from 1.2 percent and 0.7 percent, respectively, in our previous projections. The upward revision to our growth forecast reflects that we no longer look for declining investments”, added Danske Bank.

Private consumption is still expected to grow at a lower rate year-on-year as higher oil price is likely to be a headwind to consumers’ spending. However, the progress in labor market and the higher consumer sentiment indicate towards a high growth in private consumption. The risk the projections continue to be high as it is still early days since the UK voted to leave the EU, noted Danske Bank.

The information available regarding the economic situation of the currency bloc after the Brexit vote includes just survey-based data. However, negative impact of the Brexit is likely to come from a rise in uncertainty and the expected easing of sentiment.

“Looking further ahead, we see some downside risk to our forecasts, as the uncertainty may affect the economy with a lag”, stated Dankse Bank.

Political events in particular, such as the Italian constitutional referendum later in2016 and the parliamentary and presidential elections in France, Germany and The Netherlands next year might adversely affect the euro area economy.

On the monetary policy front, the ECB is now likely to keep the policy on hold during its meeting in September. However, the central bank is still expected to eventually extend QE purchases beyond 2017 because of the lack of a sustainable inflation path, according to Dankse Bank.