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.
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).
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