Euro area GDP growth likely to slowdown in 2016 on reduced consumer spending

The European Commission measure of euro area consumer confidence fell in February, possibly indicating the drop in equity prices and raised worries regarding the global economic condition. Indeed, there is a strong link between consumer confidence and euro-zone equity prices.

The consumer confidence measure fell to -8.8 in February from -6.3, the fourth drop in six months and the lowest level since December 2014. Euro area confidence is now consistent with the annual consumer spending growth slowing to around 1% from 1.7% in Q3.

Consumer confidence is unlikely to drop further, as the worries regarding the global growth are overdone. The equity prices should recover in 2016, while the slow and steady rebound of labor market is expected to continue. Meanwhile, the European Central Bank is widely expected to ease policy in March that will help keeping consumer borrowing costs down.

However, it might take many months before it is clear that the global economy is not worsening. Euro zone's wage growth is expected to be slow, while as the effect of declining oil prices fades, accelerating inflation will cut spending power of consumers.

"The big picture is that we think that consumer spending will contribute to a slowdown in euro-zone GDP growth from 1.5% last year to about 1.2% in 2016", says Capital Economics.