OREANDA-NEWS. The increase in eurozone second quarter GDP is consistent with our view that the single currency area's short-term macroeconomic outlook has improved, but medium-term growth prospects are generally weak, Fitch Ratings says.

Seasonally adjusted GDP rose by 0.3% qoq and 1.2% yoy in the eurozone in 2Q15, Eurostat said on Friday. Annual growth rates have accelerated slowly but steadily in recent quarters, supporting our view that the bloc's recovery can strengthen. Our baseline forecast is for eurozone GDP growth to increase from 0.9% in 2014 to around 1.6% in 2015-2017, supported by a weaker euro, low oil prices, rising confidence, and ultra-loose monetary policy (including QE) and improved credit conditions.
Nevertheless, high debt and structural weaknesses will weigh on the recovery, and potential growth is weak compared with other major advanced economies. Eurozone quarterly growth slowed in 2Q15 after 0.4% increases in the previous two quarters (the strongest readings since 2010). Of the bloc's largest economies, Spanish growth continued to accelerate, but France recorded no growth in 2Q15 from the previous quarter as consumer spending fell. Italy's qoq growth rate fell to 0.2% from 0.3%, and Germany's rose by just 0.1pp to 0.4%. Unemployment is high (11.1% in June) and inflation low (0.2% in July), although the risk of deflation has eased.

Weak medium-term growth prospects are a key constraint on eurozone sovereign ratings, with historically high public deficit and debt ratios. Eurostat said last month that aggregate eurozone government debt had risen to 92.9% of GDP at end-1Q15.

Despite the bloc's better macroeconomic short-term outlook, we have taken more negative than positive rating actions on eurozone sovereigns in recent months, with weak actual or potential growth and/or deteriorating fiscal metrics a contributing factor in several cases. This includes Finland, which was the only eurozone country where Friday's data showed GDP contracting in 2Q15. We revised the Outlook on Finland's 'AAA' rating to Negative from Stable in March due to weak and worsening growth prospects and structural weaknesses in the economy, after several years of sluggish performance.

Conversely, this month we revised the Outlook on Ireland's 'A-' rating to Positive from Stable, as the country's solid and broadening economic recovery characterised by higher domestic consumption is supporting fiscal consolidation, improving sovereign debt dynamics.

Recent rating actions on Greece have been driven by the course of its bailout programme negotiations with its official creditors. While Greece posted 0.8% qoq GDP growth in the second quarter of 2015, we forecast a contraction for the year due to the disruption caused by capital controls, bank closures, and the uncertainty about a possible 'Grexit' in July.