Euro zone inflation likely to post 1.3% in 2016

The euro zone economic recovery remains on track, despite headwinds from political uncertainty in Greece, slower growth in emerging markets and recurring global commodity price shocks. Incoming key indicators 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. 

Furthermore, euro zone unemployment has fallen to a three year low of 10.9%, while high frequency survey data, such as PMIs, business and industrial sentiment, for October proved stronger than expected, defying expectations of a modest decline. 

Euro zone inflation also edged up slightly to 0% y/y in October from -0.1% in September, and core inflation rose to 1% y/y from 0.9%. Nevertheless, headline inflation remains well below the European Central Bank's (ECB) target of close to, but below, 2%. 

Meanwhile, risks to the near-term outlook are on the downside, with slower growth in China threatening to temper global growth and export demand at a time when the Volkswagen emissions scandal is far from resolved and the economic impact of the migrant crisis is still unknown. 

"Against this backdrop, the ECB has indicated that it will not hesitate to unleash additional monetary stimulus, likely in the form of expanding or extending its quantitative easing program, which could come as soon as December. We expect euro zone inflation to end the year at 0.2% y/y and at 1.3% in 2016", says Scotiabank.