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tribune news network
Doha
Qatar National Bank (QNB) Group expects eurozone economic growth to slow down in 2017 and says the leaders will be pressed to find new ways to boost growth.
The weekly economic commentary released on Saturday says that growth will ease compared to the last two years as some supporting tailwinds fade, although growth is expected to remain above-trend of 1.5 percent in 2017.
The European Central Bank (ECB) kept policy unchanged at its latest monetary policy meeting on March 9, but ECB President Mario Draghi struck a decidedly optimistic tone about the progress of the eurozone economy in remarks after the meeting.
Steadily falling unemployment, rising activity data and improving economic sentiment were hailed as evidence of the success of monetary policy. These developments, combined with above trend growth over the past two years (2 percent in 2015 and 1.7 percent in 2016), have fuelled an upbeat outlook for the eurozone in 2017.
According to QNB, there are three key factors affecting growth in the eurozone. First, higher oil prices should slow consumption, a key driver of overall growth over the past two years. Consumption added an average of 1.1 percentage points (pps) to growth in 2015 and 2016, or approximately 60 percent of growth.
This was largely due to low oil prices which boosted real disposable income and profits. With oil prices forecast to rise from $45 per barrel in 2016 to $55 per barrel in 2017, we expect this will impose a drag on growth of around 0.3 pps relative to the previous year, says the report.
Second, the support to growth from monetary policy is expected to diminish in 2017. Monetary easing has helped lift domestic demand over the past two years by reducing short-term lending costs, which in turn, increased investment and aided the recovery in the labour market. But most of the easing has already occurred and the debate has in fact shifted to when the ECB would begin to taper its asset purchasing programme and increase rates.
In addition, longer-term interest rates are expected to gradually rise, because of higher US rates, and this would pass-through to mortgages and other long-term borrowing costs in the eurozone.
Overall, the support from the ECB's current easing stance is expected to be limited and offset by slightly higher long-term rates in 2017, leaving the impact of monetary policy on growth as neutral.
Third, the QNB expects weakness in the euro to boost net exports but this would be partly offset by weaker external demand from the eurozone's key trading partners.
Diverging monetary policy between the ECB and Federal Reserve will widen interest rate spreads between the US and Europe, attracting inflows into the US and increasing the value of US dollar relative to the euro.
The weaker exchange rate would boost the competitiveness of the eurozone's exports while providing impetus to slow import growth, QNB notes.
Current market expectations are for the EUR/USD to depreciate from an average of 1.10 in 2016 to 1.05 in 2017, or a decline of 4.5 percent. But export growth is likely to be curtailed by weaker external demand from the UK, as a result of the sharp fall in the pound, and China, where growth continues to slide.
The UK and China represent over 20 percent of the bloc's goods exports together. QNB expects net exports to only increase growth by 0.1 pps compared to the previous year.
In addition, the eurozone outlook faces major downside risks from a busy political calendar in 2017, QNB said.
The imminent triggering of Brexit by the British government to begin negotiations with the EU on exit terms looms on the outlook.
"If the end result is indeed a 'hard Brexit', this could hurt the eurozone as export-oriented firms delay investment and start to re-orient away from the UK in anticipation of higher trade barriers," the report said.
Additionally, key elections in 2017 in the France and Germany could bring populist leaders into power, intensifying anti-EU sentiment and raising the spectre of a breakup of the eurozone itself, QNB said.
Monetary policy has been the mainstay supporting growth in the eurozone over the past few years but appears stretched to its limits.
Combined with receding tailwinds from oil prices and external demand, policy makers may rotate towards fiscal policy to support growth in the event of a major shock from Brexit or another political crisis, the report said.
