Eurozone to post growth of 1.7% this year – Lloyds Bank

The analysis team at Lloyds Bank anticipates Eurozone to grow by 1.7% this year on the back of solid economic indicators for the region.

Key Quotes

 “Business surveys have been solid at the start of the year, with the Eurozone composite PMI averaging 55.6 in Q1. This is consistent with GDP growth of 0.6%q/q, which would be stronger than the Q4 outturn of 0.4%q/q, although the ‘hard’ numbers may point to a slightly less robust outturn. But overall, there is little indication that political uncertainties relating to the start of ‘Brexit’ negotiations or upcoming French elections are having a negative impact on sentiment. Latest polls reaffirm that Front National’s Le Pen looks likely to face off with independent centrist Macron in the final round of voting on 7th May, with the latter expected to win. Increasing support for left-wing candidate Melenchon, however, has raised the risk of an unexpected outcome.”

“Overall, we expect Eurozone growth this year at 1.7%, which would match last year’s outturn. Headline CPI inflation has risen sharply in recent months, although it fell back from 2.0%y/y in February to 1.5%y/y in March, which is an indication that it has yet to reach the target on a sustained basis. Indeed, underlying ‘core’ inflation, excluding food and energy, remains subdued below 1%.” 

“The ECB left policy rates unchanged after its 9th March meeting and reaffirmed that monthly asset purchases would be reduced to €60bn in April and extended until the end of the year. Discussions among ECB officials in recent weeks on whether policy rates may be raised before the end of QE led to premature market pricing for a rate hike this year.”

“In our view the comments were more a look-ahead into 2018, when asset purchases are more likely to be wound down than this year. For now, given that underlying domestic price pressures remain subdued, we anticipate the ECB will fulfil its stated aim to continue with its asset purchases until the end of the year, while keeping policy rates unchanged. The ECB, however, may tweak its forward guidance on interest rates in the coming months in response to diminishing deflation risks. We have reduced our German 10-year bund yield forecast to 0.5% from 0.7% at end-2017 and to 1.1% from 1.2% at end-2018.”