Euro area economic growth likely to subside in years ahead, says DNB Markets

The upturn of euro area economy has strengthened further this year. Increased optimism stimulates consumer and investments, and export growth continues to be solid because of continued brisk demand from China. Growth is expected to subside in the years ahead because of an easing in Chinese economy, an unwinding of pent-up demand and eventually higher interest rates, noted DNB Markets in a research report.

Growth rates are still likely to exceed the potential, which is low because of slow productivity and population growth. Consequently, unemployment is expected to continue to fall. Meanwhile, core inflation and wage growth are expected to pick up; however, gradually and modestly as global competition will continue to play a vital role in wage settlements, stated DNB Markets.

With a surprisingly solid upturn, the ECB would be confident enough in the outlook for core inflation to remove the unconventional elements of its monetary policy next year. The policy is expected to be adjusted cautiously, trying to avert that financial conditions tighten too soon.

According to DNB Markets, the ECB is expected to announce a continuation of the Asset Purchase Program in the first half of next year, reducing monthly purchases by EUR 20 billion to EUR 40 billion. The APP is expected to be tapered gradually to zero and deposit rate is likely to be hiked to zero in the course of the second half of 2018.

“In 2020 we expect the ECB to be ready to hike its refi rate, leaving it at 0.50 percent by year-end”, added DNB Markets.

At 22:00 GMT the FxWirePro's Hourly Strength Index of Euro was highly bullish at 110.399 the FxWirePro's Hourly Strength Index of US Dollar was neutral at -38.9921. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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