Euro area economy likely to expand 1.7 pct in 2017, inflation to average 1.8 percent – Lloyds Bank

The euro area economic growth was flat in the first quarter of this year, coming in line with consensus expectations. The GDP growth came in at 0.5 percent sequentially and 1.7 percent year-on-year in the March quarter, matching the fourth quarter outturn. Solid levels of business confidence at the beginning of the second quarter imply that the positive momentum is expected to carry on, noted Lloyds Bank in a research report.

Furthermore, political risks have eased for now, with ‘populist’ support rising, but failing to break through, in the Dutch general election and the French presidential election. In all, the euro area economy is on the course of 1.7 percent growth this year, according to Lloyds Bank.

Italy is the most notable weak link, where economic underperformance and legacy non-performing loans have yet to be resolved. The Italian economy is expected to expand 0.9 percent in this year, considerably lower that Spanish, French and German economies that are likely to grow 2.8 percent, 1.4 percent and 1.8 percent, stated Lloyds Bank.

The annual headline consumer price inflation of the currency bloc came in at 1.9 percent in April. This converged the ECB’s goal of close to, but below 2 percent. However, policymakers continue to be unconvinced regarding its sustainability, as underlying domestic price pressure continue to be soft. The euro area jobless rate has dropped steadily in the past four years; however, it stays high at 9.5 percent. Therefore, wage growth continues to be weak. The wage growth is likely to gradually rise in the quarters ahead.

“Overall, having flirted with deflation over the past couple of years, we expect headline inflation to average 1.8 percent this year and 1.6 percent in 2018”, added Lloyds Bank.