Euro zone economic recovery has proven quite resilient this year

The euro zone economic recovery has proven quite resilient this year, despite turmoil in Greece, slower growth in emerging markets and recurring global commodity price shocks. Incoming business surveys continue to point to steady growth of around 0.4% q/q in the third quarter, which is consistent with the improvement seen in industrial production, retail sales and exports. The details of the latest PMI survey also indicated a sharp rise in new orders and backlogs, which could be indicative of higher production in the months ahead. 

Nevertheless, the euro zone recovery remains fragile and challenges persist. The region continues to face uneven growth dynamics, with solid growth in Spain and Germany contrasting the more muted outlook in France and Italy. Meanwhile, risks to the near-term outlook are on the downside, with slower growth in China threatening to temper demand for exports, while the economic impact of the migrant crisis is still unknown. 

Meanwhile, the Volkswagen emissions scandal poses a significant threat to German output, and will likely have wide-reaching implications on the European auto industry. Against this backdrop, euro zone real GDP growth could soften in the final quarter of the year, bringing the annual rate of growth to 1.4% this year and 1.6% in 2016. The inflation outlook has also softened due to the pullback in global oil and other commodity prices, with the headline print easing to -0.1% y/y in September from 0.1% in August. 

The European Central Bank (ECB) has indicated that it will not hesitate to unleash additional monetary stimulus if downside risks inhibit its efforts to lift inflation towards its target of close to, but below, 2%. However, the ECB will take its time to gauge the risks, which likely leaves out its October meeting and points to further action, if necessary, in December. 

"We expect euro zone inflation to end the year at 0.2% y/y and at 1.2% in 2016", says Scotiabank.