Euro area Q1 growth upwardly revised on surge in domestic demand

Euro area's first quarter growth figure has been upwardly revised on a seasonally adjusted basis mainly owing to surge in domestic demand, led by household consumption that remained major contributor to the area’s growth.

Real gross domestic product (seasonally adjusted) came in at 0.6 percent q/q and 1.7 percent y/y in the euro area, rising from 0.4 percent q/q previously, according to latest data released by the Eurostat. The highest rates of growth in core EA countries were recorded in Spain and Austria at 0.8 percent and Germany at 0.7 percent, while a negative rate of growth was registered in Greece at -0.5 percent.

Household final consumption expenditure rebounded to 0.6 percent q/q, almost double of what it was in the fourth quarter of 2015, which was led down by incidents as the Paris terrorist attack and mild weather. However, government consumption has grown at a robust rate as migrant-related expenditure, exerted upward pressure on total public spending increasing in Germany, Austria Italy, Spain and Portugal.

Further, net exports were again a drag on growth as imports halved their rate of growth to 0.7 percent on quarter from 1.4 percent q/q, while exports growth decelerated significantly to 0.4 percent q/q from 1.7 percent q/q in Q4 amid weak global demand and a stronger EUR.

Overall, full year real GDP growth is projected at ca. 1.6 percent in 2016 and ca. 1.7 percent in 2017, up from 1.5 percent in 2015, supported by robust private consumption growth, improving labor market conditions, and a  gradual pick-up in investment growth compared to past recoveries dampened by policy uncertainty, Eurobank reported.

The expected decline in real interest rates and higher profit margins should also have a positive impact. Domestic demand will also capitalize on some fiscal easing in the short to medium- term; while the ECB’s accommodative monetary policy stance will continue to be transmitted to the economy.