Preliminary GDP data for the first quarter of 2017 shows no slowdown in activity despite a rise in inflation.
The eurozone economy enjoyed a strong start to 2017, with GDP expanding by 0.5% quarteronquarter, matching the previous quarter and consensus estimates.
Although this is just a preliminary reading with few details provided, it suggests an ongoing recovery which is helping to slowly lower unemployment, confirmed at 9.5% yesterday for the monetary union.
Compared to private business surveys, the GDP data was actually a little weaker, but many economists were forecasting a slowdown in growth due to the pickup in inflation in recent months.
Higher inflation means less disposable income in real terms for many households, which should have resulted in a slowdown. Therefore, the continued solid growth suggests households have managed to smooth their consumption.
Looking ahead, the risks to growth are tilted to the upside, especially as we forecast inflation to fall back to lower levels by the end of the year. While this is positive news for growth, the already low level of inflation is likely to keep the European Central Bank cautious. It will probably extend quantitative easing into 2018, albeit at a slower pace of purchases.
Azad Zangana – Senior European Economist & Strategist – Schroders