Country Economic Forecasts > Eurozone

Recent data has been mixed. Strikingly, the composite PMI fell in September to its lowest since the onset of QE, but it still does not point to a marked slowdown in GDP growth in Q3. We also think that the recent weakness may be caused by volatility in the German data and may thus overstate the degree to which service sector growth has weakened. So we maintain our above-consensus growth assessment for the near term, with GDP growth seen slowing only slightly from 1.6% this year to 1.5% in 2017. But further ahead, we have become more pessimistic about the outlook, reflecting a view that total factor productivity growth will remain subdued. We think that Eurozone potential GDP growth is probably only just over 1%, and as a result we now forecast growth will be only about 1.4% in 2018 and 2019 and then tail off thereafter.We expect weaker potential growth to result in a slower normalization of official interest rates and government bond yields. We now do not expect the key policy rate to be raised until 2020, even though in the near term we think the ECB will be forced to raise its inflation forecasts in December.