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S&P raises eurozone growth forecasts, expects inflation to remain subdued

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S&P raises eurozone growth forecasts, expects inflation to remain subdued

S&P Global Ratings raised its forecast for eurozone growth, saying the single currency area's economy has been buoyed by a revival in world trade, but a fall in sentiment surveys in the first months of 2018 might indicate the rate of expansion is leveling off.

The rating agency now expects the eurozone to grow by 2.3% in 2018 and 1.9% in 2019, after the region's economy grew at its fastest pace in a decade in 2017.

"Global momentum has lifted the eurozone's economic prospects, and it now appears to have reached cruising altitude," economists Jean-Michel Six and Marion Amiot wrote in a report. "In this environment, the labor market will continue to create jobs, and falling unemployment will likely start putting more upward pressure on wages from the end of this year."

But eurozone sentiment surveys have declined since the start of 2018, indicating this part of growth cycle may have peaked, S&P said. Inflation is expected to remain subdued in 2018 and price pressures should be kept in check until the end of 2019 by the remaining slack in the labor market and increasing productivity.

"We expect the European Central Bank will only gradually wind down its asset purchase program from September until the end of this year," the analysts said, although they added that they expected wages growth to accelerate and for underlying inflation to move closer to the central bank's 2% target at the end of 2019, permitting an increase in interest rates in the third quarter of that year.

"Risks to the eurozone outlook are mainly external. Trade tensions, a sharp drop in the value of financial assets, or faster monetary policy normalization in the U.S. could all weigh on growth," they said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.