Eurozone economic growth likely to stabilise in 4Q16, January inflation to climb higher

The Eurostat is expected to release its advance estimates of gross domestic product (GDP) for the last quarter of 2016 and January consumer inflation numbers on January 31. Growth is likely to have stabilised into 4Q16 while January inflation climbs on higher commodity prices and base effects. German January inflation galloped to 1.9 percent y/y, lifting bond yields of peripheral member countries due to taper concerns, reported DBS Bank in its research note.

The economy likely stabilised at 1.7 percent y/y (0.4 percent q/q) in the last quarter of 2016, also taking 2016 GDP growth to 1.7 percent. Lead indicators point to steady household spending trends as the labour market continues to improve. But this could be at risk this year as real wages ease on rising inflation and higher oil prices, they added.

The Government expenditure is expected to support economic growth in the last quarter of 2016, while keeping capital formation at around 2-3 percent. Members countries export growth is anticipated to jump from seasonally strong end-year demand. Additionally, consumer inflation is likely to grow 1.4 percent y/y in January from 1.1 percent in December driven by a recovery in crude oil prices and favourable base effects.

It is worth noting that the European Central Bank have to change its plan to keep easing policy stance in 2017, if economic growth stabilises and consumer inflation recover to more than three-year highs.

Lastly, the DBS Bank noted that the Eurozone member countries are likely to become more vocal in the months ahead, with German leaders pushing the European Central Bank (ECB) to consider an exit from the quantitative easing (QE) program, while France/ Spain back status-quo. The ECB is unlikely to budge, until it is convinced that the improvement in economic conditions is sustainable.