Eu­ro­zone econ­omy ex­pand­ing, but at a slow pace

Financial Mirror (Cyprus) - - FRONT PAGE -

Eco­nomic growth in the euro area is ex­pected to ac­cel­er­ate mildly, but re­main weak. It will amount to 0.3% in the first and sec­ond quarters of 2015 re­spec­tively, fol­low­ing 0.2% in the fourth quar­ter of 2014, ac­cord­ing to the lat­est fore­cast by the Ifo In­sti­tute (Mu­nich), INSEE (Paris) and IS­TAT (Rome).

The av­er­age fig­ures for 2015 dis­guise het­ero­gene­ity among coun­tries: the in­sti­tutes ex­pect ro­bust growth for Ger­many and Spain, mod­er­ate ex­pan­sion in France and weak de­vel­op­ment in Italy.

The ex­pan­sion will pri­mar­ily be due to in­ter­nal eco­nomic fac­tors. The re­cov­ery in the labour mar­ket is ex­pected to be very grad­ual. Pri­vate con­sump­tion will be sus­tained only by fee­ble wage dy­nam­ics and very low in­fla­tion, re­duced by the re­cent drop in the oil price, and re­sult­ing in a mod­er­ate in­crease in real dis­pos­able in­come.

In­vest­ment is fore­cast to re­cover in 2015 boosted by the ac­cel­er­a­tion of in­ter­nal and ex­ter­nal de­mand, to­gether with more favourable fi­nanc­ing con­di­tions. Un­der the as­sump­tions that the oil price sta­bilises at $56 per bar­rel and that the dol­lar/euro ex­change rate fluc­tu­ates around 1.21, in­fla­tion is ex­pected to be 0.1% in Q1 2015 and 0.2% in Q2.

Risks to this sce­nario are nu­mer­ous. On the up­side, both the fall in oil price and the de­pre­ci­a­tion of the euro pro­vide a stim­u­lus to in­ter­nal and ex­ter­nal de­mand. On the down­side, risks are re­lated to the out­come of the up­com­ing par­lia­men­tary elec­tions in Greece and its pos­si­ble im­pli­ca­tions for the sta­bil­ity of the euro zone.

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