Eurozone’s consumer spending is likely to slow down in the near term, largely owing to the rise in global oil price. However, progress in the labor market is expected to contribute little positivity to the economic activity of the common currency zone.
The expected slowdown in private consumption is not an indication that the recovery will derail, as growth in investments is expected to strengthen in the second half of 2016. Business sentiment is expected to improve and prevailing uncertainties will subside once the aftermath of Brexit referendum dies down.
Meanwhile, domestic demand has remained supportive for a long time, but foreign demand should also start to contribute due to the progress in the US and China. External financing is more available while the costs of borrowing are historically low and thus support the investment decision. Investments have only recovered modestly following the crisis implying that the need to modernize the capital stock is currently very high, Danske Bank reported in a research note.
"Overall we look for GDP growth of 1.6 percent in 2016 increasing to 1.7 percent in 2017," the report commented.
International organizations are focused on the need for a considerable amount of structural reform of the economy, thereby lifting the potential growth of the economy and lowering the high structural unemployment rate. However, different regions require different modes of reform. Spain, Italy and Portugal need to tackle their high long-term and youth unemployment rate while Germany should focus on increasing productivity in the service sector.
Meanwhile, the European Central Bank is expected to ease again with a further extension of quantitative easing, as the central bank is unlikely to foresee inflation reaching a sustainable target of 2 percent, Danske reported.
"In our view, it could be that the ECB will extend the purchases by six months to September 2017 and also announce a future tapering, where monthly QE purchases are gradually lowered by EUR20bn per month before ending in January 2018," the bank said.
