In a new economic update – The euro area in 2016: solid growth, low inflation, easier policy – AB said the eurozone ended 2015 on a “firm footing” and is likely to grow by 1.7 per cent in 2016.
However, while the region’s recovery is expected to continue in 2016, its political outlook remains a significant liability and potential impediment.
“While no major elections are scheduled this year, political fragmentation is now a fact of life in most euro-area countries,” the update said.
According to AB, the eurozone’s fractured political environment has led to the rise of unstable, left-wing coalitions as evidenced by recent elections in Portugal.
“At the same time, Greek risks lurk in the background and the euro area would not be unaffected should the UK vote to leave the European Union,” AB stated.
“Add to this another influx of migrants/refugees from the Middle East, and it’s clear that, even if the euro area is on a firmer footing, challenging times still lie ahead.”
The update also indicated the European Central Bank (ECB) will likely continue its monetary easing program. Headline inflation has come in below 0.5 per cent for 18 months, remaining a challenge for the economy.
“We expect more monetary easing in 2016, helping to anchor bund yields and providing further support for peripheral bond markets," AB said.
Soft inflation, according to AB, is a result of downward pressure being placed on inflation as a result of renewed weakness in the oil price. Additionally, growth is not yet strong enough to generate “sustained” upward pressure on inflation.
In order for growth to accelerate within the economy, in addition to the elimination of political risks, a pick-up in emerging markets needs to commence.
“Until the external backdrop improves, it’s difficult to see a material acceleration in the pace of euro-area growth.”
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