BofA ML marks up euro area GDP, expects premature ECB exit
By Alexander Bueso
Date: Monday 08 May 2017
(ShareCast News) - Economists at Bank of America-Merrill Lynch bumped up their growth forecasts for the euro area this year, but a slight slowdown is seen in 2018, with inflation even set to stray even further from the European Central Bank's target amid political challenges in France, Italy and Spain.
Significantly, they penciled in a one-off hike in the ECB's interest rate on deposits and the end of quantitative easing at the end of 2018, but cautioned clients that such a move would be "premature".
"This would qualify as a premature exit in view of inflation dynamics, driven by political constraints, which could threaten debt sustainability at the same time that the ECB is running out of tools to deal with any negative shock in the short run."
The invesment bank raised its projection for Eurozone GDP in 2017 from 1.5% to 1.7%, after marking-to-market for recent data, but said growth would slow back to 1.5% next year.
Without stronger global growth, an annualised rate of expansion of 2% would be hard to sustain, they said.
In parallel, consumer prices were still seen rising by 1.6% and 1.3% in 2017 and 2018, respectively, assuming a price of oil at $53 a barrel.
On a positive note, the medium-term outlook for France "could be quite bright", they said, but the bank's economics team dared not be too optimistic.
"Given the choice for a prudent reformist agenda and uncertainty on the political capacity to deliver on these policies, we remain cautious."
For Italy too, they observed that: "the outlook is clouded by uncertainty over the political sphere and the long-term prospects."
BofA-ML also lifted its forecast for Spanish GDP growth in 2016 from 2.5% to 2.8%.
However, political dynamics in that Mediterranean country were seen as potentially turning negative.
"Political developments could complicate in the second half. The results of the centre-left PSOE primaries on 21 May are the key development to watch."
The outlook for German growth in 2017 was also marked-up, by 0.2 percentage points to 1.8%, but they judged that for a more marked acceleration to occur stronger global growth would be needed.
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