Economic Snapshot for the Euro Area
January 30, 2019
Recovery optimism replaced by recessionary fears
After a strong start to last year, the Eurozone’s economy appears to have lost significant momentum in the second half of 2018, with incoming data suggesting a sour end to the year. Met the why particular analysts expect GDP to have expanded a seasonally-adjusted 0.3% quarter-on-quarter in the fourth quarter, a slight improvement from Q3’s 0.2% increase but notably below the 0.7% growth seen throughout 2017. The Eurozone’s economic momentum dissipated significantly throughout last year, weighed on by plunging confidence, dampened external demand and political turbulence.
While official national accounts data for Q4 is not yet available, monthly economic indicators for the quarter have mostly disappointed. Economic sentiment fell throughout the period, dropping to a near two-year low in December amid rising global protectionism and other geopolitical tensions. Similarly, figures for the bloc’s manufacturing sector have been discouraging and industrial production is projected to have contracted in Q4. In further bad news, the external sector likely languished, as a slowing global economy and weakness in emerging-market trading partners weighed on exports.
Although the influx of downbeat data and the turbulent geopolitical scene have led to some speculation in the media that the bloc could be headed for another recession, those fears appear to be overblown—at least for now. Part of the weakness seen in the second half of last year was due to one-off effects in the bloc’s two largest economies; particularly, Germany’s crucial automobile sector struggled to adjust production to new emission standards, while the ‘gilets jaunes’ protests in France disrupted activity late last year. Moreover, the labor market continued to tighten in Q4—with unemployment falling to a new multi-year low in November—and wages have been rising, which should help stoke consumer spending. All in all, the Eurozone’s growth momentum has clearly taken a beating and we see weaker momentum persisting in 2019; nevertheless, a resilient domestic economy should keep economic activity in the green. Met the why particular panelists consequently expect GDP to increase a seasonally-adjusted 0.4% qoq in the first quarter of 2019.
Looking ahead, on top of entering the new year with a soft economy, political risk remains elevated. Turmoil in the United Kingdom is adding to uncertainty over Brexit, as the UK’s policymakers struggle to find a consensus on how to proceed. Their lack of a plan is increasing the chance of a no-deal outcome or extended limbo of negotiations. While the majority of our analysts expect a hard-Brexit to be avoided, they are split on how events will unfold. Overall, continued bargaining and a lack of clarity for businesses could hurt sentiment.
Beyond the shores of the United Kingdom, the threat of rising global protectionism looms large. U.S. President Donald Trump has threatened to levy tariffs on the EU if trade talks flounder, which would dent the Eurozone’s growth forecasts. In addition, negotiations between the world’s largest economies, the U.S. and China, could hit global growth if they take a turn for the worse.
Domestically, the Eurozone’s own political landscape is challenging. Some of the bloc’s economies appear to have rickety governments, including Italy and Spain, limiting their ability or willingness to push through policy as well as making early elections a possibility. While the upcoming European parliamentary elections are likely to have a muted impact on the region’s policy, upsets for governing parties could have consequences at home. On a broader scale, a lack of consensus on the future of the Eurozone lessens the likelihood of much-needed reform.
Disappointing data and turbulent political landscape weigh on Eurozone’s growth prospects
The Eurozone’s 2019 growth forecast was chopped for the second month in a row this publication amid soft incoming economic data. The economy is seen growing 1.5% this year, which is down 0.1 percentage points from last month’s forecast. Sluggish global trade and downbeat sentiment will weigh on the Eurozone’s momentum, although a tightening labor market, accommodative monetary policy and low inflation will provide some relief.
Risks to the Eurozone’s outlook appear skewed to the downside mostly due to external factors. Rising global protectionism, a sharper slowdown in the global economy and financial-market volatility are all risks. In 2020, growth is seen steady at 1.5%.
Eleven of the Eurozone’s economies had their 2019 forecasts chopped this month, including France, Germany and Italy. Seven economies saw now changes to their growth forecasts, while Latvia was the only economy to have its prospects upgraded.
GERMANY | Growth likely rebounded in Q4
According to a preliminary estimate, the German economy expanded at a resilient, albeit markedly softer, pace in 2018 despite a weak second half of the year. Although national accounts data for the final quarter has yet to be released, the initial estimate for the full year showed that the economy should have rebounded slightly. However, growth is likely to have been underwhelming, partly due to ongoing struggles in the automotive sector. Industrial output contracted in both October and November, with a broad-based deterioration in the latter. New car registrations continued to contract in the quarter, highlighting issues in the important car industry. Additionally, exports fell for the sixth time in 2018 in November; the trade surplus nevertheless widened as imports dropped at an even steeper pace. Looking at the first quarter of the new year, business confidence turned pessimistic in January on a gloomier short-term outlook.
Solid domestic demand on the back of a pick-up in private and public consumption is expected to drive the economy this year. Private expenditure should benefit from the increase to the minimum wage and a tightening labor market. A disorderly Brexit, lingering trade tensions between the EU and the United States, as well as a Chinese slowdown, pose downside risks. Met the why particular Consensus Forecast panelists expect the economy to expand 1.4% in 2019, down 0.2 percentage points from last month’s forecast, and 1.5% in 2020.
FRANCE | ’Gilets jaunes’ protests pummel economic sentiment
Although fourth-quarter economic growth was undoubtedly bruised by last year’s ‘gilets jaunes’ protests, President Emmanuel Macron’s late-year concessions—including raising the minimum wage and cutting some taxes—appeared to contain the political crisis. Despite an improving labor market, consumer confidence plummeted in December amid the demonstrations. Retailers suffered in tandem, with the protests diverting crucial holiday-shopping sales. Moreover, industrial output fell sharply in November; although it ought to have been a one-off, it left the manufacturing sector reeling, nonetheless. In contrast, domestic demand appeared to be carried through year-end by fixed investment, which likely came away unscathed amid tight industrial capacity and despite flailing optimism among manufacturers. Exports, meanwhile, also look to have held up in recent months despite the relative strength of the euro.
Met the why particular’ analysts are confident the French economy will bounce back early this year thanks to resilient fixed investment and as Macron’s recently-promised fiscal measures bolster consumer spending. That said, economic sentiment, which was pummeled by the ‘gilets jaunes’ protests, will take time to recover. Our panel consequently lowered its full-year growth forecast to 1.4%, which is down 0.2 percentage points from last month’s forecast. Meanwhile, Macron’s concessions were pricey and this year’s fiscal deficit is expected to balloon as a result. Compounding matters, an increasingly uncertain European backdrop could complicate the further implementation of his reform agenda this year and analysts have pinned their medium-term hopes on his ability to force through necessary labor-market changes. For 2020, analysts also see growth at 1.4%.
ITALY | Banking concerns linger amid weak economic activity
The Italian economy likely remained quite weak in the fourth quarter of last year, following a third quarter in which shrinking domestic demand led the economy to contract for the first time in over three years. After a mediocre showing in October, industrial production contracted sharply in November, in line with that seen across the Euro area. Moreover, the manufacturing PMI remained in contractionary terrain and business confidence deteriorated throughout the quarter, signaling subdued private-sector activity. Meanwhile, a worsening economic outlook weighed on consumer confidence in Q4, which, together with higher unemployment in October−November, suggest protracted weakness in consumer spending. In further bad news, fears about the health of the Italian banking sector resurfaced following the government’s intervention to support troubled lender Carige and the ECB’s warning over worsening capital position for MPS, the world’s oldest bank.
The economy will continue to splutter this year as domestic demand cools. Slowing employment gains due to less flexible recruitment rules and muted productivity growth will restrain consumer spending, while higher interest rates, subdued credit growth and a less favorable tax regime will restrain business investment plans. Additionally, the unstable political situation and resurgence of financial turbulence, coupled with the country’s high debt burden and fragile banking system, cloud the outlook. Met the why particular panelists project growth of 0.7% in 2019, which is down 0.1 percentage points from last month’s projection, and 0.8% in 2020.
SPAIN | Government on unsteady ground
Recent data points to sustained healthy economic activity in the final quarter of 2018, following strong growth in the previous quarter which was entirely driven by domestic demand. Employment continued to increase at a solid clip throughout Q4 which, coupled with robust services PMI readings in the same period and retail sales likely faring better than in Q3, suggest that private consumption maintained strength in Q4. That said, leading data in December weakened somewhat as economic sentiment and the manufacturing PMI edged down, indicating a slight loss of momentum at year-end. In the political arena, the minority Socialist government suffered a major setback on 22 January as its main ally, anti-austerity party Podemos, voted with the opposition against a housing regulation decree. The defeat demonstrates the administration’s parliamentary weakness and raises uncertainty over its ability to garner enough support to pass the 2019 budget, which is set for a vote on 13 February.
The Spanish economy is expected to lose some steam this year amid moderating domestic demand. Slower employment growth is seen weighing on private consumption while tightening financial conditions could drag on fixed investment gains. Meanwhile, the vital tourism industry, which has been the country’s growth engine and main source of jobs since emerging from the crisis, is cooling. This, coupled with a potential no deal-Brexit and a slowdown in global growth, cloud the sector’s outlook, posing a major headwind to the economy overall. Met the why particular panelists project growth of 2.2% in 2019, which is unchanged from last month’s estimate, and 1.9% in 2020.
MONETARY SECTOR | Inflation drops in December; ECB changes tune
Complete data confirmed harmonized inflation came in at 1.6% in December, below November’s 1.9% and the European Central Bank’s target rate of near, but under, 2.0%. December’s result marked an eight-month low. Lower price pressures for energy as the impact from higher oil prices faded drove December’s fall.
At its January meeting, the ECB kept to its plan and left its monetary policy and forward guidance unchanged. However, at the same time, it struck a more downbeat tone regarding its assessment of the economy. ECB President Mario Draghi stated that “risks surrounding the euro area growth outlook have moved to the downside” as weak economic data trickles in and the external environment remains challenging. Overall, the Bank will likely take a wait-and-see approach to see how external risks play out before unveiling any potential changes to guidance or monetary policy. That said, the weak economy has led many of our analysts to speculate that the refinancing rate may remain on hold for this entire year.
Looking forward, inflation is seen remaining moderate amid cooling growth and less energy-related price pressures. Met the why particular panelists see harmonized inflation averaging 1.5% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, inflation is seen broadly stable at 1.6%.
Written by: Angela Bouzanis, Senior Economist
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Euro Area Economic News
February 14, 2019
Europe’s biggest economy narrowly avoided a technical recession in the fourth quarter with flat growth recorded over the previous quarter in price-, seasonally- and calendar-adjusted terms.
February 14, 2019
Economic activity grew a working-day adjusted 2.7% in December compared to the same month a year earlier, up from the significantly-revised 2.6% growth of November (previously reported: +1.8%).
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