Regardless of the ECB’s actions last week, four forces are coming together that will lift euro area growth over the next two years to a level that is well above the current consensus of 1.1% for 2015, and 1.6% for 2016.
- Diminished Fiscal Drag: given the improvement in structural budget balances, the need for additional austerity measures has diminished. As a consequence, the contribution of government spending to real GDP growth in the euro area as a whole should increase from 0.1% in 2013-14 to around 0.5 percentage points over the next two years. The peripheral countries should see a growth boost of around one percentage point.
- Lower Oil Prices: The euro price of oil has fallen by almost 50% since last summer. Granted, the forward curve implies that about a quarter of this decline will be unwound over the next two years. Nevertheless, even taking this into account, the IMF estimates that lower oil prices will boost euro area GDP by around 0.9% relative to a baseline where oil prices had stayed elevated.
A weaker euro and a swing from negative to modestly positive credit growth will also propel euro area growth.