Eurozone economy likely to decelerate slightly in Q3, may improve gradually next year

The second quarter economic growth data for the euro area went hand in hand with a significant upward revision of historical data, said Erste Group Research. The revised data showed that the euro area economy grew 1.9 percent last year, as compared with the earlier figure of an annual growth of 1.7 percent. This has resulted in a positive shift of reported growth in the first half of 2016.

The economic growth in the second quarter of 2016 weakened moderately to 1.6 percent year-on-year. Region wise, Germany and Spain continued to mainly drive the growth in the currency bloc in the second quarter of 2016. The Spanish economy expanded 3.2 percent year-on-year, whereas the German economy grew 1.7 percent annually in the second quarter.

On the contrary, the Italian and French economies witnessed slowdown in growth momentum. Both the countries were dragged down by issues in the regional banking sector. On the component level, investment and spending continue to drive the economic growth.

Meanwhile, the U.K.’s vote to leave the EU has raised uncertainty regarding the euro area’s economic outlook for the second half of 2016. Business and consumer sentiment dropped considerably in parts of the currency bloc in July and August. First signs of a rebound were witnessed in September.

“Based on economic data released to date, we expect GDP growth in the euro zone to weaken slightly to 1.5 percent y/y in Q3”, added Erste Group Research.

The uncertainty set off by the Brexit referendum is anticipated to temporarily weigh on investment, consumer spending and trade. In the course of next year, the situation is likely to improve gradually. The member nations of euro area are likely to succeed in attracting foreign investment in the medium term, which is likely to stimulate growth.

“Overall we expect GDP growth of 1.5 percent in 2016 and a slight acceleration to 1.7 percent in 2017. As a result it should now take longer for the euro area's output gap to close”, noted Erste Group Research.

Euro area’s economic growth in the medium term is expected to move toward possible output that might come in at around 1.1 percent in 2017.