Euro area economy likely to expand strongly in 2017, private consumption to mainly drive economic growth

The euro area economy expanded 0.5 percent sequentially in the first quarter, the same pace as in the fourth quarter of 2016. This was consistent with expectations but slightly below suggested by survey indicators. Capital spending and private consumption are expected to have been the key economic growth drivers.

Solid confidence indicators are indicating to at least similar growth in the next quarter. According to a Nordea Bank research report, the euro area economy is expected to expand 1.9 percent in 2017, while the cyclical recovery is likely to continue through to 2018. The euro area economy is expected to expand 1.8 percent.

Private consumption is likely to continue to be the main growth driver, underpinned by increasing employment and real income gains. The rebound is comparatively employment-rich. Most new jobs are being generated in the service sector, a lot of them are part-time. This trend is expected to hold on. This suggests that there continues to be a significant amount of slack in the economy, explaining moderate wage growth and just gradually rising core inflation.

Even if private consumption is expected to continue as prime growth driver, momentum is expected to be slightly less than in 2016 due to higher inflation. This might be countered by higher investment in machinery, equipment and construction, underpinned by accommodative financial conditions, stated Nordea Bank.

Meanwhile, net trade is unlikely to contribute much to the economic growth. But exports are expected to advance from a recovery in global trade. The Brexit process is unlikely to impact the euro area recovery significantly.

All the euro area economies are likely to expand in 2017-2018. Germany and Spain are expected to expand the fastest, added Nordea Bank.