Eurozone growth goes from strength to strength
Real GDP accelerates as ECB mulls tapering QE.
1 August 2017
The “flash” estimate for second quarter eurozone GDP shows quarterly growth accelerated to 0.6%, up from 0.5% from the first quarter.
This takes year-on-year growth up to 2.1% - the fastest rate of growth since the first quarter of 2011.
At this stage, only a handful of member states have published their second quarter GDP figures. However, highlights include France (0.5%), Spain (0.9%), Austria (0.9%) and Belgium (0.4%), most of which met or beat expectations.
It seems that the eurozone is finally getting over the sovereign debt crisis as growth has broadened among member states. Helped by ultra-loose monetary policy and a resurgence in world trade, the eurozone looks set to beat most forecasters’ expectations for the year.
Where next for the ECB?
This raises questions over the appropriateness of the European Central Bank’s (ECB) stimulus programme. Hawkish members of the governing council think that it may be time to reverse some of the policy measures, such as quantitative easing (QE) and the negative deposit rate.
The ECB is set to review its growth and inflation forecasts ahead of its 7 September meeting. While growth will have surpassed the Bank’s expectations, inflation is still likely to be a concern. The latest annual reading from July shows headline inflation at 1.3%. This is under the ECB’s target of close to, but below 2%. This suggests that there is still a need to provide stimulus for the economy.
Another concern that the ECB will need to consider is the recent appreciation in the euro. This should lower inflation over the next few quarters. It could also start to hurt export growth. However, while world trade is still accelerating, the recovery in underlying demand is likely to more than offset any currency effects in the near term.
We expect ECB president Mario Draghi to announce no change in interest rates and an extension to the ECB’s QE programme into 2018, but with reduced monthly purchases of €40 billion per month. We then expect a review of policy progress later in the year, where what is effectively tapering will continue.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.