Eurozone economic growth likely to pick up in Q4 as employment, domestic demand lend support

Economic growth in the eurozone is expected to show upward momentum in the last quarter of this year on substantial support from labor market as well as domestic demand. Although, the euro area unemployment rate remains high but it fell to a seven-year low of 9.8 percent in October, with employment growth supporting household demand.

Recent economic data show that economic growth has remained moderate. Q3 GDP growth was 0.3 percent q/q, the same as the prior quarter, and survey indications suggest that it will be stronger in Q4. Risks to the economic outlook remain to the downside and they include the aforementioned political risks, as well as ongoing concerns about the Italian banking sector following years of economic underperformance, Lloyds Bank reported.

Although euro area headline CPI inflation rose to a two-and-a-half year high of 0.6 percent y/y in November and is set to accelerate further as a result of energy price base effects, underlying 'core' inflation remained unchanged at 0.8 percent y/y and is actually lower than it was a year ago.

The euro area economy has so far weathered political surprises in the form of the UK’s referendum vote to leave the EU and the election of Donald Trump as the next US President. In the euro area, Austria rejected the far-right candidate in a rerun of the presidential election, while Italy voted against proposed constitutional changes to the Senate.

An unexpected victory for Le Pen would call into question the EU project. Germany’s Chancellor Merkel, meanwhile, is expected to win a fourth term, although the right-wing AfD party is a key wildcard.

"Overall, we expect the euro area economy to expand by 1.6 percent in both 2016 and 2017. We also expect headline inflation to accelerate from an average of 0.2 percent in 2016 to 1.4 percent in 2017, but it is not forecast to be sustained at the ECB’s goal of 'close to but below 2 percent' until 2018," the report said.

Meanwhile, EUR/USD traded at 1.05, up 0.47 percent, while at 6:00GMT, the FxWirePro's Hourly Euro Strength Index remained highly bullish at 136.57 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex