Euro area growth to slow further

Elliot Clarke from Westpac is out with a research note on why the Eurozone could see constrained growth heading into the future.

Key quotes (source: Elliot Clarke, Westpac)

"With the benefit of hindsight, we believe that 2017 will be seen as this cycle’s peak year for Euro Area growth. Against the 2.5% year-average outcome for 2017, we foresee growth of 2.1% in 2018 then 1.6% in 2019. While a little more optimistic, the ECB has a similar view, expecting growth of 2.4%, 1.9% and then 1.7% in 2018, 2019 and 2020 respectively."

"...the growth trend has been flattered over the past three years by a wave of (nonrecurring) pent-up demand that has finally been released after being held back for many years."

"...this spending has partly been funded by the much freer availability of consumer credit in addition to household income. This has allowed consumption growth across the continent to run well ahead of the pace that income growth (by itself) would have allowed."

"Consumers also continue to report that they are dissaving. This reduction of savings may be offset by wealth gains on housing and equities; but unless an asset is sold, household cash balances will remain depleted."

"...evident in business surveys such as Germany’s IFO is the beginning of a broad-based softening in expectations. Though currently still above average, a further deterioration in growth expectations will put at risk job and wage growth, and hence momentum in activity and inflation."

"Only time will tell whether this slowdown will be significant for policy or not. Both the ECB’s and our expectation remain constructive, with growth to remain above potential. That would be enough to warrant (a few) gradual rate hikes. The risk however is that the consumers’ appetite to spend recedes more dramatically and/or income growth disappoints, forcing the issue. Either outcome would delay the ECB from rate hikes indefinitely."

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