Eurozone economic recovery likely to continue into 2017-18; monetary policy to remain loose, says Nordea Research

Eurozone’s economic recovery is expected to continue in 2017-18. Core inflation will rise slowly, allowing the loose monetary policy to continue. Elections will probably see euro-sceptic forces progress, making economic reforms and closer integration hard to achieve.

The Euro-area economy has developed as expected during recent months. Growth to the tune of 1.5 percent was mainly driven by private consumption, while capital spending is expanding only very moderately. The recovery is relatively labour-intensive, with employment growing by 1.25 percent y/y most recently. The unemployment rate has declined to 9.8 percent, but the differences between the countries remain huge.

Private consumption will likely remain the prime engine of growth. While residential investment should continue to be supported by very low interest rates, we expect only a moderate increase in the growth of investment in machinery and equipment. However, there is a upside risk that investments start correcting upwards from their currently low level, Nordea Research commented in its latest research report.

Also, the policy mix will remain heavily skewed towards an expansionary monetary policy, while fiscal policy will likely remain neutral. On top of the political risks, the Euro area faces a number of external risks given the high level of uncertainty globally. Aside from politics, a downside risk to growth is a possible stronger increase in oil prices.

"We expect 1.5 percent GDP growth for 2016 and 2018, but slightly less momentum in 2017 as the boost from low energy prices fades and demand from the UK will likely slow down," the report said.