Euroarea economic growth likely to slowdown in H1 2017, says Barclays

The euro area continued to have relatively resilient business sentiment through October as was seen through the PMI and EC surveys.  Europe appears to have gained from a recovery in global industrial activity since the summer, especially in China. As expected, Germany is gaining the most given its greater exposure to global trade and the manufacturing industry, noted Barclays in a research note. In the meantime, sentiment has continued to be weak in Italy, France and Spain, particularly in the service sector.

The economic activity in the euro area is expected to record a quarter-over-quarter growth of 0.3 percent at the end of 2016, the similar pace seen in the previous two quarters, according to Barclays. Earlier, increased financial and political uncertainties were expected and the upcoming Brexit negotiations were expected to hurt sentiment and investment starting in the fourth quarter.

The euro area economy is expected to slow down for a temporary period in the first half of 2017. Firstly, the gradual increase in headline inflation triggering from increased prices of commodity and oil prices is expected to hurt consumers’ real disposable income and thus private consumption, which is likely to rise just 1.3 percent in 2017, as compared with the projected increase of 1.5 percent this year, stated Barclays.

Furthermore, the upcoming political uncertainties are expected to delay an improvement in business investment that has been a disappointment since the start of 2016. Still-subdued corporate profits and high corporate debt are not favorable to an additional rebound in business investment. And political and policy uncertainties, which should take centre stage in the weeks ahead, would possibly further delay the decisions for investment.

Thus, gross capital formation is expected to stay flat in the first half of 2017 before resuming growth in the second half. The reacceleration is expected to come from a reduction in political uncertainty, particularly in France and in Italy.

“Overall, we now expect euro area GDP growth of 1.2 percent in 2017 and 1.6 percent in 2017. However, the risk of a global slowdown resulting from potential protectionist measures once US President-elect Trump takes office in January presents a downside risk to European exports, and therefore to euro area growth, in 2018”, added Barclays.

The EUR/USD was trading 0.1 percent lower at 1.0881 by 0935 GMT, hovering towards a 2-week low of 1.0864 hit on Thursday, while at 9.00 GMT, the FxWirePro's Hourly Euro Strength Index stood slightly bearish at -93.4408 (the range between -75 and -100 is slightly bearish).