TalkingEconomics: European forecast update - stuck in second gear

Eurozone growth is in for a seesaw end to 2015 and start to 2016 but the UK continues to perform well. Inflation, however, remains the key to both regions' monetary policy outlook.

11 September 2015

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Eurozone mixed, UK shows strength

We have nudged down the eurozone growth forecast for 2015 and revised it slightly upward for 2016. The main change is lower inflation expected for the region as a result of lower energy prices.

The UK continues to perform well, and its forecast has been revised up. Lower energy prices will keep inflation lower for longer which leads us to push out our forecast for the first Bank of England (BoE) rate rise.

Eurozone inflation concerns

Eurozone growth disappointed in the second quarter as France stagnated, while Germany struggled with weaker domestic demand against a backdrop of elevated political risk caused by Greece.

Italy continues along its sluggish recovery path, but the bright spot has been Spain, which continues to surpass expectations.

With regards to our forecast, we have made some minor tweaks across the board but for the eurozone in aggregate, growth has been nudged down for 2015 to 1.3% (from 1.4%) and revised up slightly for 2016 to 1.7% (from 1.6%).

Overall, we continue to forecast an acceleration in growth for the second half of the year, and heading into next year.

On the inflation side, the forecast has been lowered significantly as the sharp decline in global energy prices is likely to feed through to energy inflation in the coming months.

QE expected to continue

As a result, we could see eurozone headline inflation dip back below zero before the end of the year.

However, as the largest declines in energy prices took place at the start of the year, by the first quarter of 2016, eurozone inflation should begin to recover once again.

We expect the European Central Bank (ECB) to look through this near-term negative shock to inflation, especially as growth is likely to remain robust.

We expect the ECB to continue with its quantitative easing (QE) programme as currently stated, ending in September 2016, but keeping interest rates on hold well into 2017.

UK forecast: growth revised up, but rate hike delayed

UK growth has been revised up for both 2015 and 2016 due to historical upward revisions for the second half of 2014 which mechanically lift the annual 2015 growth rate, a smoother path of fiscal tightening (as suggested by the Chancellor’s post-election Budget) and lower energy prices.

We now expect growth of 2.5% in 2015 (up from 2.2%) and 2.1% in 2016 (up from 1.9%).

Low energy prices will also keep inflation low and we forecast inflation to stay below the 1%, the Bank’s lower threshold of its target rate, until early 2016 when the initial falls in energy prices drop out from the annual comparison and inflation starts to rise again.

We assume the Bank will not want to raise rates when it is still missing its inflation target, so forecast the first rate rise to occur in May 2016 (previously February 2016).

For more articles on the outlook for the global economy why not try:

Schroders Economic Infographic September 2015

TalkingEconomics: Forecast update - Strong dollar and cheap oil favour advanced over emerging

TalkingEconomics: EM forecast update - downward revisions

Or download the full September Economic Infographic below:

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, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.