BENGALURU - The euro zone economy will muddle through this year and next with steady but modest growth in a slowdown from 2017, according to economists in a Reuters poll, which shows a majority expecting a brewing U.S.-led trade war to hold back growth.
The currency bloc grew at its fastest pace since the 2007-2008 financial crisis last year, but lost momentum in early 2018 and the coming year's outlook remains tepid, with inflation slowing down slightly and veering away from target.
Still, the Reuters poll of 90 economists taken between Aug. 13 and 21 shows that the European Central Bank is on track to shutter its asset purchase programme by December after spending a whopping 2.6 trillion euros on bonds to boost price pressure.
The main risk to the outlook remains the United States and China's tit-for-tat trade tariffs and threats that there are more in store.
While U.S. President Donald Trump and European Union chief executive Jean-Claude Juncker last month secured a fragile trade peace, U.S. and Chinese officials are expected to take only a few modest steps to resolve their trade differences this week.
"For the moment it seems that the Trump-Juncker meeting has cleared the air somewhat between the U.S. and Europe. We can't discount the trade war flaring up again in the second half of the year ... it could be that it will have more of an impact," said Bert Colijn, senior euro zone economist at ING.
"The question is how much that is going to be, which is very difficult to say, but we've already downgraded our forecasts somewhat over the past months."
Nearly two-thirds - 33 of 53 economists - said Trump's trade disputes have had a damaging impact on their euro zone growth predictions. While the remaining 20 respondents said they had no impact, none of the economists expected them to be beneficial.
Alongside the threat of a global trade war, the possibility of Britain leaving the European Union without a deal in March 2019 as well as other political turmoil are also seen as risks.
Median growth forecasts for early next year were downgraded from a July poll. Quarter-on-quarter growth was expected at 0.4-0.5 percent every quarter this year and next. Forecasts ranged from 0.3 to 0.6 percent.
The economy should expand 2.1 percent this year after 2.7 percent in 2017, slowing down further to 1.8 percent in 2019.
"The big question is whether this slowdown can be considered 'normal', or whether it is a premature downturn with respect to Europe's position within the economic cycle," noted economists at BNP Paribas.
"Of course, the answer differs depending on the country. Those hit hardest by the crisis are the least likely to run up against supply constraints. Inversely, economies that are already at a mature stage in the cycle are more prone to enter a slowdown phase."
When asked about the probability of a euro zone recession over the next 12 months, the median view rose to 15 percent from 10 percent in last month's poll.
Still, the ECB is widely expected to raise borrowing costs next year after keeping rates ultra-low for a decade while inflation was mired far below its 2 percent target ceiling.
Inflation touched 2 percent in June, driven by rising energy prices, and was forecast to average 1.7 percent for the next two years, slightly up from July predictions for 1.6 percent this year and next.
The poll showed the ECB will hike its deposit rate by 15 basis points to -0.25 percent in the third quarter of next year and the refinancing rate to 0.25 percent from zero in the fourth quarter of 2019.