Shift from external to domestic demand-driven growth
Real GDP growth accelerated from +0.7% in 2014 and +0.9% in 2015 to an average +1.4% y/y in H1 2016 (+1.6% in Q1; +1.2% in Q2). The improvement in H1 came mainly from consumer spending, which eventually returned to growth of +1.3% y/y after two full years of decline, and fixed investment which picked up to an increase of +2.7% y/y on the back of a recovery in con¬struc¬tion investment (+2.1% y/y). Public spend¬ing expansion moderated slightly to +1.1% y/y in H1. Export growth slowed down to an aver¬age +3.1% y/y and was outpaced by imports which were up by +3.6% y/y, so that net exports made a small negative contribution to H1 GDP growth, after being the key growth driver in 2014-2015 (see Figure 1).
Improving economic sentiment points to continued gradual recovery
Advanced indicators suggest that the gradual economic recovery will be sustained. Growth of industrial production turned positive in mid-2015 and the upward trend in the Purchasing Managers Index (PMI) for the manufacturing secctor indicates that this will continue (see Figure 2).
Likewise, real retail sales growth turned positive in mid-2015 and the upward trend in Eurostat’s Consumer Confidence Indicator since end-2015 signals that private consumption should continue to increase in the next quarters (see Figure 3).
As a result, Euler Hermes expects full-year real GDP to expand by +1.4% in 2016, driven by well-diversified domestic demand. The contribution of net exports will likely be neutral or slightly nega¬tive as real imports will grow faster than exports. Growth in 2017 is forecast at +1.5%, with the pattern of growth being more balanced between domestic and external demand (see Figure 1).
Inflation to remain subdued
Consumer price inflation remained at 0.6% y/y in August 2016 for the fourth consecutive month and down from a 14-month peak of 1.2% in Janu¬ary 2016. The downward price trend for fuels continued in August, though the annual rate of decline of fuel prices was less pronounced than in July. Euler Hermes forecasts average annual inflation to edge down from 0.9% in 2015 to 0.8% in 2016 before picking up to 1% in 2017 (see Figure 1).
