Geopolitical uncertainties surrounding Brexit, US economic policy and European elections are likely to stunt economic expansion in the year ahead

The German economy expanded less than expected in the final three months of 2016, dragging down growth in the 19-nation eurozone.

Europe’s largest economy expanded by 0.4% between October and December, according to the German statistics office, Destatis. This was lower than the 0.5% forecast by economists. German growth in the third quarter was revised lower too, to 0.1% from 0.2%.

With Italian growth also disappointing, economic conditions in the eurozone at the end of last year were not quite as rosy as previously thought. Eurostat, the European commission’s stats office, cut its growth estimate from 0.5% to 0.4%, the same pace as in the third quarter, with industrial production down sharply in December.

Germany, generally regarded as Europe’s economic powerhouse, is lagging behind the UK, which grew at 0.6% in each of the last three quarters. Despite uncertainty caused by the Brexit vote, consumer spending has stayed strong in Britain, although it is expected to slow in coming months as rising inflation starts to eat into people’s pockets.

Eurozone growth rises to 0.5%; Trump adviser claims euro 'grossly undervalued'- as it happened Read more

In Germany, growth in the fourth quarter was driven by government spending, while household consumption increased slightly. Business investment also improved, especially in the construction sector. But growth was held back by trade for the second quarter in a row, with imports outstripping exports.

Italy also disappointed, trailing other major European economies with just 0.2% growth and rising unemployment rates. France grew by 0.4% in the fourth quarter while the Netherlands expanded by 0.5%, a slower pace than before. The bright spot among the large economies was Spain with 0.7% growth.

At the other end of the growth scale, the Greek economy contracted by 0.4%, while Finland shrank 0.5%, as years of austerity and the sanctions imposed on neighbouring Russia took their toll.



Jessica Hinds, European economist at the research consultancy Capital Economics, said: “Rising energy prices and concerns about euro breakup are likely to cause GDP growth to slow this year.” She noted that the closely watched German ZEW investor survey dropped markedly in February due to political uncertainty surrounding Brexit, US economic policy and European elections.

Several economists are expecting the eurozone’s 0.4% growth rate to be achieved again in the first quarter of this year but the outlook could darken after that.

Eurozone consumer spending slows but exports rise Read more

Chris Williamson, chief business economist at economic data firm IHS Markit, said: “There are clearly many risks to the outlook further ahead, notably including elections in the Netherlands, France, Germany and possibly Italy, as well as Brexit and Italy’s banking problems, all of which have the potential to create additional economic uncertainty and subdue growth.

“It therefore seems likely that the eurozone will struggle to see 2017 GDP growth match the 1.7% expansion recorded in 2016.”

Bert Colijn, senior eurozone economist at ING, struck a more positive note: “Strengthening domestic demand seems to be the overarching story for the eurozone recovery in recent months as employment growth has accelerated, confidence is well above long-term averages and the housing market is recovering in all eurozone economies. These factors are currently outweighing geopolitical uncertainties, but that does not mean that caution among consumers and businesses becomes stronger in the months ahead as elections come closer.”

The Dutch general election next month is the first test for Europe’s populists. The French go to the polls in April and May to elect their new president, while Germany’s election is in September, pitting chancellor Angela Merkel against the new Social Democrat leader Martin Schulz.