Euro zone growth outlook still modest, inflation to lag US

The euro currency bloc was expected to grow 1.4% in Q2, the lowest consensus for the period since a poll in October.

BENGALURU: The economic growth outlook for the euro zone this year is unchanged from last month, which was the lowest expected rate since early in the pandemic, a Reuters poll showed, while inflationary pressures were seen lagging the United States.

While the euro region was expected to emerge from a double-dip contraction this quarter, driven by an accelerating vaccination program and easing of restrictions, forecasts for quarterly growth for the rest of the year were downgraded slightly from last month.

For the full year, the consensus of nearly 75 economists in the May 10-13 poll showed 4.1% average growth for the euro zone, the same as last month, which was the lowest prediction for 2021 since a poll in April last year, when the pandemic began to take hold.

Still, nearly three-quarters of economists, or 23 of 33, in said response to an additional question that the risks to their growth forecasts were skewed more to the upside, suggesting the worst is likely over for the euro zone.

"GDP has fallen in four of the last five quarters. The good news, however, is that things should get better towards the end of Q2 as the vaccination programme will allow governments to lift restrictions, hopefully for the last time," said Andrew Kenningham, chief Europe economist at Capital Economics.

The currency bloc was expected to grow 1.4% in Q2, the lowest consensus for the period since a poll in October.

Vaccination in progres in Italy - File picVaccination in progres in Italy - File pic

The third and fourth quarter outlook was also lowered, with about 60% of common contributors having either downgraded their growth forecasts for each quarter this year, or left them unchanged in the latest poll compared to last month.

That suggests higher data readings in the coming months will be driven by extreme year-over-year comparisons due to severe economic shutdowns from March last year.

Still, a stronger than expected U.S. consumer prices report on Wednesday pushed euro zone bond yields to rise sharply, with long-term euro zone inflation expectations hitting their highest since 2018.

Over 90% of economists, or 37 of 40, in response to an additional question, said euro zone inflation pressures would lag the United States. The others said it would roughly be at the same pace.

None of the economists expected the currency bloc's price pressures to exceed the United States, highlighting the diverging growth and inflation expectations between the euro zone and the United States.

The poll consensus pointed to inflation in the euro area rising sharply to average 1.7% this year, with inflation projected to reach and breach the ECB's target of close to but below 2% rate - averaging 1.7%, 2.0% and 2.3% in Q2, Q3 and Q4 2021, respectively, on an annual basis.

But the projected rise in price pressures this year was not expected to be sustainable, with inflation forecast to ease substantially and average around 1.3% in each quarter next year.

"Inflation, which is moving to the ECB's target, is likely to go back to far below 2%. The ECB is more worried it is not able to bring inflation up on a sustained basis rather than being too concerned about inflation being too high," said Angel Talavera, head of European economics at Oxford Economics.

To tame rising bond yields, the ECB in March announced its readiness to increase the pace of the Pandemic Emergency Purchase Programme (PEPP), but in recent week calls for scaling back that programme as early as next quarter have increased.

But nearly two-thirds, or 23 of 36, in response to a separate question, said the ECB would start winding down its PEPP sometime next year, including 12 who said in Q1 2022.

The remaining 13 respondents penciled in this year, including five who said next quarter.

"You have the hawks on the council who say maybe it's time to start cutting the pace of purchases on the pandemic emergency purchase programme, but most of the council will consider it too early, especially if we see some pick-up in sovereign yields," said Philippe Gudin, senior economist at Barclays.

- Reuters
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