Fitch: Eurozone Growth Accelerates, Cyclical Recovery Continues

The acceleration in eurozone growth in the second quarter confirms that the bloc's cyclical recovery is broadening, according to Fitch Ratings. This is reflected in the credit rating’s GDP forecasts, although it expects the pace of growth to slow in 2018-2019.

Eurozone GDP rose by 0.6% in 2Q17 from the previous quarter, and 2.2% from a year earlier, Eurostat said on Wednesday. Year-on-year growth accelerated in the four largest eurozone economies, including France and Italy, although both grew more slowly than the bloc as a whole.

Faster growth in some countries underscores how cyclical recovery is taking hold across the currency union. The Netherlands, for example, posted a 3.8% yoy GDP increase in 2Q17, up from 2.7% in the first quarter. The Netherlands Bureau for Economic Policy Analysis said the strong reading meant growth would exceed 3% this year for the first time in a decade.

Several factors have supported growth. Political risks to the eurozone eased following the French elections, business confidence has risen, export demand has improved, and monetary policy support for the economy has gained further traction (credit standards for loans to enterprises eased in 2Q17, according to the ECB's July bank lending survey).

Falling unemployment, which hit an eight-year low of 9.1% in June, has boosted consumer confidence.

“We therefore raised our 2017 GDP growth forecast to 2.0% from 1.7% in June. We forecast growth to slow to 1.8% next year, partly due to slower consumption growth as households no longer feel the full benefit of falls in energy prices. Brexit negotiations and US trade policy are creating uncertainties around international trade,” says Fitch.

“Moreover, our 2019 forecast (1.4%) is in line with our view that demographic and productivity trends, coupled with narrowing output gaps, constrain medium-term growth potential for the major developed economies, although near-term eurozone growth will remain close to the above-potential rates of recent quarters. We think potential growth in advanced economies over the next five years will generally be in the range of 1.25%-1.75%.” 

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