Euro area economic growth likely to slow in 2016

At the end of 2015, the euro area economy is expected to have gained certain momentum, according to survey indicators. The composite PMI indicates that the economy grew around 0.4% in Q4, as compared with the growth of 0.3% in Q3. Meanwhile, the European Commission's measure of economic sentiment indicates an annual growth of 2% or more.

However, there are indications that the rebound in consumer spending, which was responsible for most of the rebound in GDP growth in 2015, is weakening.  According to the monthly retail sales data, household spending might have declined in Q4. Moreover, the spending is expected to further slowdown in 2016 as increase in real incomes from lower inflation reverses.

By the end of 2016, headline inflation is expected to accelerate to around 1% even if euro and oil prices remain stable. Meanwhile, exports, which had increased on a weaker euro, are also seen weakening. Moreover, the positive impact of any more depreciation of the euro might be counteracted by the uncertain global scenario.

The fiscal policy stance throughout the currency bloc can be a positive influence; however, the cumulative effect of the earlier austerity might weigh on growth for a brief period of time.

"Growth is expected to slow to just to above 1% in 2016 before picking back up again moderately next year", says Capital Economics.

The ECB is expected to be under more pressure to further extend its policy. The central bank is likely to quicken its asset purchases and further lower its interest rate in Q2 2016.