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The euro area economy had surprised on the upside in the first quarter, growing strongly. The disturbance in the financial market at the beginning of 2016 had raised projections of a weaker momentum. However, the euro area economy, on a seasonally adjusted basis, expanded 0.6 percent in the first quarter of 2016. The first quarter growth rate was twice the growth recorded in the last quarter of 2015 and more than the growth rate recorded in the US and the UK.
Domestic demand continues to be the main economic growth driver. Consumers and investors do not seem to have been dented by worries regarding the emerging market economies’ and European banks’ performance. Private consumption, such as in 2015, is becoming a dependable pillar, said KfW Research in a research report. With the gradual rebound of the labor market, private consumption grew strongly by 0.6 percent.
However, in order to put the euro area rebound on a stable foundation, the investment constraint that has continued since the financial market crisis should come to an end noted KfW Research.
Gross fixed capital formation is not yet considerably higher than in late 2010. The currency bloc, in this regard, is falling much behind the US, where activity in investment has risen by over 20 percent and has come back to the pre-crisis levels in the same period. A somewhat firmer investment growth of 0.8 percent is seen in the second quarter, added KfW Research.
The possibilities for businesses in Europe to maintain their urgent growth and renewal of capital stock are quite good as enterprises can collect the benefits of a favorable financing environment and ongoing economic recovery.
“Despite the encouragingly strong first quarter, we see no cause for euphoria and maintain our previous growth forecast of 1.6 percent for 2016 and 1.8 percent for 2017,” said KfW Research.
The Euro area in the second quarter is likely to grow slowly before it picks up the momentum again in the second half of 2016.
