Shift from external to domestic
Real GDP growth accelerated from +0.7% in 2014 and +0.9% in 2015 to
an average +1.4% y/y in H1 2016 (+1.6% in Q1; +1.2% in Q2). The
improvement in H1 came mainly from consumer spending, which
eventually returned to growth of +1.3% y/y after two full years of
decline, and fixed investment which picked up to an increase of
+2.7% y/y on the back of a recovery in con¬struc¬tion investment
(+2.1% y/y). Public spend¬ing expansion moderated slightly to +1.1%
y/y in H1. Export growth slowed down to an aver¬age +3.1% y/y and
was outpaced by imports which were up by +3.6% y/y, so that net
exports made a small negative contribution to H1 GDP growth, after
being the key growth driver in 2014-2015 (see Figure 1).
Improving economic sentiment points to
continued gradual recovery
Advanced indicators suggest that the gradual economic recovery will
be sustained. Growth of industrial production turned positive in
mid-2015 and the upward trend in the Purchasing Managers Index
(PMI) for the manufacturing secctor indicates that this will
continue (see Figure 2).
Likewise, real retail sales growth turned positive in mid-2015 and
the upward trend in Eurostat’s Consumer Confidence Indicator since
end-2015 signals that private consumption should continue to
increase in the next quarters (see Figure 3).
As a result, Euler Hermes expects full-year real GDP to expand by
+1.4% in 2016, driven by well-diversified domestic demand. The
contribution of net exports will likely be neutral or slightly
nega¬tive as real imports will grow faster than exports. Growth in
2017 is forecast at +1.5%, with the pattern of growth being more
balanced between domestic and external demand (see Figure 1).
Inflation to remain subdued
Consumer price inflation remained at 0.6% y/y in August 2016 for
the fourth consecutive month and down from a 14-month peak of 1.2%
in Janu¬ary 2016. The downward price trend for fuels continued in
August, though the annual rate of decline of fuel prices was less
pronounced than in July. Euler Hermes forecasts average annual
inflation to edge down from 0.9% in 2015 to 0.8% in 2016 before
picking up to 1% in 2017 (see Figure 1).