Private consumption continues to drive Euroarea economy, GDP likely to grow 1.6 pct in 2016

The euro area economy is expected to grow much stronger this year than anticipated earlier. According to a Dankse Bank report, the economy of the currency bloc is likely to expand 1.6 percent. Private consumption continues to be the main growth driver; however, gains in investments have also underpinned the growth, while the PMI activity indicator points towards a rebound in business investments in the fourth quarter of 2016. Therefore, the euro area economic activity has been resilient to the political uncertainty throughout nations.

“We expect slightly weaker but still solid GDP growth of 1.5 percent in 2017 (consensus: 1.3 percent) mainly due to less support from private consumption”, added Danske Bank.

Consumers are expected to continue with most of their spending behaviour; but since there is still no upwards pressure on wage growth, the likely increase in inflation in the months ahead is set to bring down the real wage growth and therefore be a headwind to growth in private consumption.

Business activity is expected to expand, underpinned by the accommodative financing conditions, synchronised global recovery into 2017 and a need to modernize the capital stock after subdued investments during the crisis, stated Danske Bank.

The currency bloc, in 2018, is expected to expand 1.5 percent, which is more than the potential growth of about 1 percent as also seen in the falling jobless rate to 10 percent from 12.1 percent in mid-2013. Recently, the European Commission cut its estimate of the natural unemployment rate (NAIRU) to 9 percent in 2018. Therefore there continues to be a slack in the labor market  that requires to be reduced before the euro area experiences domestic driven reflation, noted Danske Bank.

At 10:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at 22.3411, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -48.3345. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex