Eurozone economy expanding, but at a slow pace

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.