Euroarea's private consumption to continue to drive economic growth

The euro area economy has been expanding for 13 consecutive quarter in which the jobless rate dropped to 10 percent from 12 percent. The still high jobless rate, particularly in France, Greece, Italy and Spain, shows that the rebound from the Great Recession and consequent debt crisis is not yet over. While trend growth continues to be low in the currency bloc, at around 1 percent annually, the cyclical recovery is likely to continue, driven mainly by private consumption, said Nordea Bank in a research note.

“We expect 1½ percent GDP growth for 2016 and 2018, but slightly lower momentum in 2017 not least due to declining demand from the UK”, added Nordea Bank.

The euro area economy is expected to be primarily driven by private consumption. The economic growth would also be underpinned by ongoing employment gains. The fall in the jobless rate is expected to carry on; however at a moderate pace. The momentum in consumption growth might have peaked already as the expected moderate rise inflation would restrict the rise in consumers’ purchasing power.

Public consumption was stimulated in many nations, such as Italy and Germany last year and in 2016 because of increased spending attributed to the strong influx of refugees. Meanwhile, fiscal policy in Germany is more expansionary because of higher investment spending, whereas Italy attempts to get more leeway for boosting measures from Brussels. Overall, fiscal policy is likely to underpin growth at least in 2016 and 2017, according to Nordea Bank.

Meanwhile, capital spending is growth at a moderate rate as compared with earlier recoveries. This corresponds with the sluggish trend in manufacturing production and in global goods trade. Moderate rise in expansion of investment in machinery and equipment is expected. Residential investment is likely to be underpinned by very low interest rates.

Exports are not expected to be a major growth driver as the currency bloc is not protected from the sluggish momentum in global trade. Also, subdued demand from the U.K. is anticipated. Net exports are likely to weigh in on euro area’s economic growth in 2017 and 2018.