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EMU CommentStrongest growth in ten years

  1. Q4 real GDP growth continued at a robust pace
  2. Investments and net exports probably the main drivers
  3. Inflation stable, but only for a limited time
4Q real GDP growth continued at a robust pace
Preliminary fourth-quarter real GDP growth for the eurozone declined slightly compared with third quarter. GDP increased by 0.6 percent q-o-q and 2.7 percent y-o-y. This was a notch lower than we had expected, but in line with consensus and a slight decrease from the third quarter's +0.7 percent/+2.8 percent, which was recently revised up. This means GDP growth managed to reach 2.5 percent for the full year 2017, the fastest pace since the pre-crisis year of 2007. This makes the outlook for 2018 continue to look strong. Even though we saw the first decline in business confidence in eight months in today’s January ESI, the economy looks set to continue to see strong economic growth at the beginning of 2018 (see graph).
Investments and net exports are probably the main drivers
The GDP numbers came without detailed components, but private consumption likely decelerated in the fourth quarter, in our view (suggested by weaker retail sales data). However, a pick-up in fixed-investment growth probably compensated for this after the somewhat disappointing third quarter, as suggested by booming order books and high capacity utilisation. Industrial production growth has so far failed to strengthen in the fourth quarter, though. Detailed French GDP numbers released today confirmed this picture and underlined stronger net trade, despite the stronger EUR last year.
Inflation stable, but only for a limited time
The strong growth outlook is intact and should translate into further job growth and lower unemployment over the year to come, in our view. We expect tomorrow's release of December unemployment figures to confirm this, although we do not expect the unemployment rate to decrease this time. Furthermore, we expect growing capacity constraints on the labour market to lead to increasing inflationary pressure this year. Even though we expect headline inflation to stay more or less unchanged in January (data tomorrow as well), as suggested by German regional CPIs this morning, we do see a chance of core CPI inflation increasing, which could mark the beginning of a period of gradually increasing underlying inflation. The ECB is likely to want to see more material evidence of this before growing more confident that inflation is about to follow a sustained path toward its target. It is worth recalling that the ECB expressed stronger confidence at the policy meeting last week. However, for now, today's GDP numbers make another upward revision of the ECB growth forecast at the March policy meeting more likely.

Source: Macrobond


Rasmus Gudum-Sessingø

Senior Economist


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