Eurozone: 0.8% core inflation in 2016, 0.7% in 2017 - RBS

Analysts at RBS forecast Eurozone’s subdued growth of 1.2% y/y in 2017 and 1.4% y/y in 2018, slightly below the 1.3% and 1.5% consensus expectations.

Key Quotes

“We judge the risks to our forecasts to be skewed clearly to the downside against a backdrop of upcoming domestic political event risk, Brexit-related uncertainty, rising global protectionism worries and lingering China growth fears.”

“Private consumption is expected to slow in 2017, primarily as the boost to real disposable incomes from lower oil prices in H1 2016 fades, but the outlook for investment is where risks seem most concentrated given the uncertain backdrop.”

“We see no more than a 0.1-0.2%-point positive impact on Euro Area GDP from a fiscal policy-related boost to US growth. Direct spill-overs tend to be small and any boost to corporate or consumer confidence in the Euro Area is unlikely to offset more domestically-centred concerns.” 

“Our inflation forecasts are below those of the consensus and the ECB in 2017 and, more notably, 2018. This is underpinned by our core inflation projections indicating underlying price pressures will struggle to recover. We forecast core inflation edging down slightly, to average 0.7% y/y in 2017 and 0.9% in 2018. This contrasts sharply with ECB staff forecasts of 1.3% and 1.5%. We believe these are over-optimistic – the ECB has been consistently shifting out expected improvements not only in headline but, importantly, also core inflation.”

“We forecast headline inflation to average 1.1% y/y in both 2017 and 2018, with the pick-up driven by energy base effects. This is below the current market consensus of 1.3% for 2017 and 1.5% for 2018 and ECB staff forecasts of 1.2% and 1.6%.”