Eurozone: Strong growth in Q1, but can it last? - ING

Bert Colijn, Senior Economist at ING, explains that Eurozone growth was confirmed at 0.5% QoQ for Q1 and while growth in the second quarter is set to remain strong, potential growth remains weak.

Key Quotes

“While an end to QE is coming closer, this sluggish trend growth limits the potential for rate hikes in the years ahead.”

“Eurozone growth in Q1 was confirmed at 0.5% QoQ, marking a good start to the year. Even though political uncertainty was high in the first quarter, Eurozone growth outpaced the US and UK. While growth in France and the Netherlands weakened somewhat ahead of elections, from 0.5 to 0.3% and 0.6% to 0.4% respectively, growth strengthened in Germany, Spain and more markedly in Portugal and Finland. While the breakdown by components will not be released until later, it is expected that domestic demand has continued to drive growth in the beginning of the year.”

“For the quarters ahead, political risks have faded to the background until the Italian elections as Macron has been elected French president, meaning that Eurosceptic parties have not taken control of the Eurozone as investors had feared at the start of the year. On top of that, backlogs of work have increased considerably in Q1, meaning that industrial output in the second quarter will likely be strong. This means that strong growth is set to continue in the months ahead.”

“Even though growth has remained strong despite political uncertainty, structural factors continue to hold back Eurozone trend growth. As the output gap will be closed in a year or two, it is important to see whether this growth pace can continue when “catch-up growth” ends. It seems that this is difficult as trend growth has slowed over the crisis years.”

“Key to further improvements in Eurozone growth potential are f.e. continued structural reforms, steps towards the completion of the single services market and a further deepening and strengthening of the monetary union. In that regard, the meeting between Merkel and Macron yesterday was encouraging. Merkel’s open attitude towards treaty change to allow further integration could potentially be a first cautious step towards a stronger growth trend in the Eurozone.”