Rise in our growth forecast for the euro area

We are upgrading our GDP growth forecast for the euro area to 1.9% this year, although we expect a modest decline in momentum in the second half.

Euro area Q1 GDP growth was today revised up to 0.6% quarter on quarter, from 0.5% in the previous estimate. This revision reflects large adjustments in several countries, and mechanically pushes our annual growth forecasts higher. We now expect euro area real GDP to grow by 1.9% on average this year, after 1.7% in 2016 and 1.9% in 2015. We had previously forecast that GDP growth this year would be 1.5%.

More than a half of the upgrade to our forecasts is due to statistical revisions to past data while the rest is due to sentiment and activity data being more robust than expectations.

We have made no change to our quarterly growth profile for H2 2017 and beyond. We continue to see a number of headwinds leading to a modest slowdown in the pace of economic expansion which would nonetheless remain comfortably above potential, at around 1.75% in annualised terms in the second half of this year.

Political uncertainty has not disappeared: after the French elections, there is the risk of early elections in Italy and Brexit negotiations are about to begin in earnest. The recent appreciation in the trade-weighted EUR is likely to weigh on the prospects for euro area exports and inflation. In all, while we expect euro area GDP to remain above potential for the time being, we believe the output gap will narrow at a slower pace going forward.

At the same time, we recognise there are upside risks. Growing evidence of ‘animal spirits’ in the corporate world could translate into higher domestic demand and further self-sustaining momentum. Additionally, a favourable resolution of political uncertainty could unlock further investment.

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