Eurozone’s economy likely to grow at moderate pace in H2, inflation to average 0.3 pct in 2016

In the second quarter, euro area’s economic growth had decelerated to 0.3 percent sequentially after growing strongly at 0.5 percent in the previous quarter. The breakdown of expenditure indicated that net exports positively contributed to the growth, countering subdued domestic demand stemming, especially from the corporate sector.

The recent evidence implies that the economy has withstood the effect of the U.K.’s Brexit vote quite well. Business sentiment was widely resilient in July, though it weakened in August in certain surveys, including the German IFO survey; however, not enough to urge additional stimulus.

There is just limited ‘hard’ data for the third quarter to date. The evidence for the beginning of the third quarter has come in mixed, with softness recorded in industrial production, new car sales and exports; however strong increases have been seen in construction output and retail sales. Euro area growth is expected to continue in the second half of 2016 at a moderate rate seen in the second quarter, said Lloyds Bank in a research note. Investment and private consumption is likely to underpin further improvements in the bloc’s credit conditions and employment.

Meanwhile, the headline CPI inflation remained at 0.2 percent year-on-year in August, whereas core inflation stripping energy and food, dropped to 0.8 percent from 0.9 percent. Thus, the weak headline rate cannot be attributed just to declining energy prices.

“We expect significant energy price base effects will kick in from September, which could raise the headline rate to around 1 percent by the end of the year, a level that has not been exceeded since 2013”, added Lloyds Bank.

But the key to maintain higher inflation in the medium-term is a rebound in core inflation. This is likely to accelerate just gradually in the forecast period, reflecting spare capacity and moderate expansion in the economy.

“Overall, we look for headline inflation to average 0.3 percent this year, rising to 1.5 percent in 2017”, noted Lloyds Bank.