The economic outlook for the eurozone has become increasingly polarized between the relatively positive domestically driven recovery, which drove GDP growth above expectations in 2015, and the decidedly negative global economic headwinds and geopolitical risks that have risen in prominence over the past six months. The slowdown in China and emerging economies, continuing rise of populist parties across continental Europe, the migrant crisis and an EU which is perhaps at its most divided and challenged since its inception, all pose significant threats to the underlying progress of the eurozone economy.
Underlying all these concerns is a domestic economy which is proving surprisingly resilient, with the labor market in most eurozone markets starting to show signs of recovery. Although employment growth of 1% in 2015 is unexceptional by pre-recession standards, it is nonetheless the fastest pace of growth since the GFC and whilst overall unemployment remains generally high it is now on a downward trend. In undersupplied sectors of the workforce a tightening of the labor market is starting to place upward pressure on wages, which combined with an inflation rate of around 0% is translating directly into rising disposable incomes, which consumers are feeding back into the economy in the form of very strong retail sales. With the price of oil taking a further dip early in 2016, inflation is only expected to rise to 0.5% by the end of the year, providing further capacity for relatively strong real wage growth, which is expected to exceed 3% in 2016 as the labor market continues to strengthen.
Source : UBS AG