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POLL-Euro zone economic recovery seen on shaky ground ahead of elections
January 12, 2017 / 2:29 PM / 10 months ago

POLL-Euro zone economic recovery seen on shaky ground ahead of elections

* reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/econ-polls?RIC=EUGDPQQP poll data

* reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/cb-polls?RIC=EUECBR%3DECI central bank data

By Shrutee Sarkar

Jan 12 (Reuters) - Recent optimism the euro zone economy has finally turned a corner on growth and inflation is on shaky ground and will only be maintained if there are no major upsets in several national elections this year, a Reuters poll showed on Thursday.

Respondents saw the last quarter of 2016 and the first two quarters of 2017 each registering 0.4 percent growth, with average full year growth seen at 1.5 percent this year and next. Inflation would be 1.4 percent in both 2017 and 2018.

The euro zone economy grew 0.3 percent in last year’s third quarter, similar to the previous three months, with all members of the currency bloc reporting an expansion, even in peripheral economies such as Greece.

There have been signs of more robust growth since, however.

Industries across the euro zone cranked up output in November and Germany ended the year with its strongest growth in five years, for example.

Yet the poll of over 65 economists this week showed little change in forecasts for growth and inflation with respondents citing uncertainty from rising protectionist sentiments after the Brexit vote last June and Donald Trump’s U.S. election win.

Elections are also due this year in Germany, France, the Netherlands and possibly Italy.

It was a similar trend across recent Reuters polls on foreign exchanges rates, bond yields and major economies.

“Europe may be in for a rough ride this year,” said Tomas Holinka, economist at Moody’s Analytics.

“While we expect the economy to expand at about the same rate as in 2016, political anxiety about the 2017 voting season could send it off the rails, while tough negotiations over Britain’s exit from the European Union could throttle trade.”

A majority of respondents who answered an extra question in the poll said the euro zone economy doesn’t have enough momentum to withstand any major political change in the coming year.

Italy’s constitutional reform referendum last month sent the euro to a 21-month low against the U.S. dollar and while its impact on financial markets was not as much as the Brexit vote in June 2016, it did boost political uncertainty.

A Reuters poll last week predicted the euro will weaken to $1.04 by end-December, from around $1.06 now, and strategists gave a median 50 percent chance it would reach or fall below parity with the dollar in 2017.

ECB

Having already spent over 1.4 trillion euros ($1.5 trillion) buying mostly sovereign bonds, the ECB last month unexpectedly said it would trim its monthly spend to 60 billion euros from April. It currently spends 80 billion euros a month.

That move shocked financial markets since euro zone inflation is still only around half the ECB’s target of just under 2 percent, despite years of money printing twinned with a zero policy rate and a negative deposit rate.

While euro zone inflation in December was the highest in 3-1/2 years, the outlook for price growth remained weak.

Not a single economist in the sample of over 60 had a 2 percent inflation call this year or next.

Economists in the poll unanimously said the ECB’s next move, after April’s planned cut in monthly bond purchases, will be to taper bond-buying further. For its meeting on Jan. 19, all economists said the ECB would hold policy steady.

“After the decision to lengthen its QE programme until December 2017, the ECB seems to be done easing. But we still believe that there will be a new lengthening of the programme into 2018 to allow for some tapering,” said Peter Vanden Houte, economist at ING Financial Markets.

In contrast, the U.S Federal Reserve, having raised interest rates in December for the second time since the Great Recession, is likely to hike twice more this year, and recent comments from policymakers suggest there could be a third move too.

TEPID PERFORMANCE ALL AROUND

Long-term growth forecasts for many major economies within the currency bloc were trimmed in the latest poll.

Germany, the euro zone’s top economy will grow per quarter to mid-2018. Inflation, which rose at the fastest pace in three years in December, is expected to average 1.6 percent in 2017.

France, the second largest economy in the union, will grow 1.1 percent this year and Italy’s 2017 GDP is likely to be 0.8 percent. Ireland, which enjoyed some of the best growth across the bloc in recent years, will expand 3.5 percent this year, the poll found.

For other stories from the poll Polling by Sujith Pai in BENGALURU, Michael Nienaber in BERLIN, Brian Love IN PARIS Editing by Jeremy Gaunt

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