Euro zone recovery appears to be on track

The euro zone recovery appears to be on track. Incoming economic data suggests euro zone real GDP will likely register growth of 0.4% q/q in the third quarter after a weaker-than-expected advance of 0.3% in the prior three month period. The region's composite PMI continued to trend higher in August, pointing to one of the best periods of economic growth and job creation since 2011, on the back of advances in both services and manufacturing activity. This is consistent with the ongoing improvement seen in lending to firms and households thanks to highly stimulative monetary policy by the European Central Bank (ECB), while consumer confidence is starting to rebound after being dampened by prospects of a Greek exit from the currency bloc. Turmoil in Greece has also disrupted the upturn seen in other hard data early this year, though the region's firmer growth dynamic is expected to feed through to a modest pick-up in retail sales and industrial production during the third quarter. 

"Given the drag from months of political challenges in Greece and recent turmoil in China, we have edged down our euro zone real GDP growth forecast to 1.3% in 2015 and 1.6% in 2016 from 1.5% and 1.7%, respectively", notes Scotiabank.

The inflation outlook has softened due to the pullback in global oil prices and a weaker trend in the cost of food and other commodities. This has led to lower the year-end euro zone inflation forecast to 0.4% y/y this year and to 1.2% in 2016. Performance figures also underscore the divergence between the euro zone's two largest economies. Indicators suggest that German economic conditions remain sound, with forward-looking and hard data pointing to an ongoing acceleration in private-sector activity, and resilient business and consumer confidence. On the flipside, private sector output growth in France cooled to a four-month low in August, signalling that Q3 real GDP could disappoint again after stagnating in the second quarter. 

"We have lowered our French real GDP growth forecast to 1% in 2015 and 1.3% in 2016", added Scotiabank.