Eurozone: A more upbeat outlook, but still surrounded by (mostly political) risks - BBVA

Research Team at BBVA note that improving confidence across sectors and major countries continued at the start of 2017 while growth momentum seems to take root in 1Q17, driven mostly by improved global demand and a weak euro…

Key quotes:

• … but hard data up to February such as industrial output and retail sales begin to moderate, though foreign trade clearly improves

• Our MICA-BBVA model for short-term growth estimates a quarterly GDP figure in the eurozone of 0.5% QoQ in 1Q17

• Growth forecasts for 2017-18 are revised slightly upwards to 1.7% (+0.1pp) in both years, driven by improving global demand. Domestic drivers remain broadly unchanged, as well as the accommodative monetary stance and non-restrictive fiscal measures in the pipeline for the eurozone as a whole

• Germany and Spain will continue to perform better than France and Italy over the forecast horizon, but there is some tendency to convergence

• Inflation pressures are still subdued. Headline inflation is expected to be higher in 2017 (+0.2pp to 1.8%) but still below 2% in 2018 (1.6%) as energy price inflation fades. Core inflation remains stable slightly below 1% and is expected to increase gradually to around 1.5% by the end of the forecast horizon • Despite the improvement in both global and European outlook, risks to growth remain tilted to the downside, mainly due to domestic political issues (2017) and to China’s pending adjustment (in the long term)