Euro Area Economic Forecast

Economic Snapshot for the Euro Area

March 27, 2019

Eurozone outlook cut for fifth consecutive month

Comprehensive data confirmed that the economy stuttered again in Q4 2018, with growth barely picking up after the Q3’s weak performance. Downbeat sentiment, troubles in the manufacturing sector and the unwinding of inventories weighed on the domestic economy. While the economic backdrop remains somber in 2019—with heightened uncertainty over Brexit and tariffs on the automobile industry—recent signs have emerged of a tentative stabilization. Retail sales jumped in January and the unemployment rate held at a multi-year low, boding well for household spending. Low oil prices, meanwhile, should keep inflation and the import bill in check. Furthermore, although economic sentiment continued to fall in February, the pace of decline moderated significantly. That said, the manufacturing PMI slumped in March, suggesting that the sector is still reeling from a slowing global economy and a bruised car sector.   

The Eurozone’s growth outlook was cut for a fifth consecutive month on the back of a disappointing 2018 and ongoing woes in the manufacturing sector. Risks to activity linger from automobile tariffs, political uncertainty and sluggish global demand. Nevertheless, a tightening labor market, contained inflation and accommodative monetary policy should provide some relief.

Met the why particular analysts expect growth of 1.3% in 2019, which is down 0.1 percentage points from last month’s forecast, and 1.4% in 2020.

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Germany Economic Outlook

After narrowly avoiding a technical recession last year, data from the first quarter of 2019 is mixed. The domestic economy should have benefited from low unemployment through February, robust service sector activity through March and improving consumer confidence in the quarter. The export-orientated manufacturing sector, however, suffered amid a more challenging economic climate in the Eurozone and more broadly. Export growth was flat in January while the downturn in the manufacturing sector intensified through March on dropping foreign demand for German goods. Weak demand from the automotive sector further drove the ongoing downturn in March and the manufacturing sector consequently dragged on the composite PMI in the quarter. In light of the gloomier Eurozone outlook, investors flocked to German bunds, driving its yield to below zero on 22 March for the first time in over two years.

Robust domestic demand, in part due to the government’s more fiscally expansionary budget that includes a higher minimum wage, should support economic growth this year. A strong labor market will further underpin resilient private consumption. Global trade tensions, a slowdown in China and Brexit uncertainty cloud the outlook, however.

France Economic Outlook

Fourth-quarter growth was modest but resilient, stable from a quarter earlier despite the social unrest of last year’s ‘gilets jaunes’ protests. Domestic demand was rocked by the demonstrations: Household spending stalled, while fixed-capital spending was hit by a drop-off in household investment. External demand beyond the Eurozone, on the other hand, was upbeat and helped offset the domestic woes. Particularly, export growth jumped on heavy-equipment deliveries. Available current-quarter indicators, meanwhile, depict uneven terrain. Economic sentiment appeared on the mend through February. That said, although industrial output hinted at a turnaround in January, private-sector activity has thus far been hit-and-miss. Moreover, Emmanuel Macron’s skirmish with protestors continues to weigh on the economy, and his political agenda looks increasingly untenable in the run-up to European elections in May.

Met the why particular analysts see growth losing more steam this year against the backdrop of weakening EU growth outlook amid sustained global trade tensions and lingering Brexit-related uncertainty. Nevertheless, the economy looks poised to withstand most of the headwinds stemming from elevated external-sector risks, thanks to fiscal stimulus propping up private consumption.

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Italy Economic Outlook

The economy remained in the red in Q4 2018, weighed down by sizable destocking and anemic domestic demand; and incoming indicators point to protracted weakness in Q1 2019, despite exports rebounding in January. Industrial output shrank again in January, while business confidence and the PMI continued to fall in the first two months of 2019, spelling trouble for private sector activity. As for households, worsening consumer confidence and a deterioration in the labor market point to subdued spending patterns. Moreover, although they remained well below 2015’s peak, the net stock of banks’ non-performing loans (NLPs) ticked up and remain a significant concern, while credit data was weak. In other news, the government endorsed China’s Belt and Road Initiative in late March, in the hope of receiving substantial infrastructure financing, disregarding concerns raised by the EU and the U.S.

2019 seems set to be another grim year for Italy’s economy, which will limp along due to muted domestic demand. The government’s labor market and tax reforms, coupled with lingering political instability, will hit job creation and discourage business investment. Moreover, its spendthrift policies could worsen already weak fiscal metrics and lead to further financial turbulence.

Spain Economic Outlook

Following robust growth in the final quarter of 2018, available data suggests that momentum carried over into early 2019. Industrial production rebounded solidly in January and while the manufacturing PMI dipped in February, signaling a slowdown in the industry, the services sector held its ground. On the demand front, private consumption should remain solid in the first quarter, propped up by healthy employment growth and higher purchasing power thanks to low inflation and households tapping into their savings. Meanwhile, although uncertainty lingers over the outcome of the 28 April general election—the third in less than four years—it is likely that political gridlock will remain. Irrespective, it should not have too great an impact on the economy in the short-term given its solid trajectory until now and the sound underlying dynamics driving growth, particularly domestic demand.

The economy is expected to lose some traction this year amid a maturing economic cycle. Nevertheless, growth should remain healthy, underpinned by still-solid private consumption and improving exports activity. The possibility of a no-deal Brexit, the ongoing slowdown of the vital tourism industry and political uncertainty cloud the outlook, however.

Euro Area Financial & Monetary Sector News

Harmonized inflation edged up to 1.5% in February (January: 1.4%), however, remains below the ECB’s target of under, but close to, 2.0%. Economic slack and moderate oil price pressures should keep inflation contained this year despite firming wage growth.  

Our analysts see inflation averaging 1.4% in 2019 and 1.5% in 2020.

In light of weak data, the ECB scaled back its growth and inflation projections, and struck a more dovish tone at its March meeting. The Bank altered its forward guidance stating that interest rates are now expected to remain at their present, low levels through the end of 2019 and provided liquidity support for banks by announcing a new round of TLTROs.

Accordingly, our panel sees the refinancing rate ending the year at 0.00%. Next year, the majority of our panelists expect the Bank to tighten rates, with Consensus for the refinancing rate to end 2020 at 0.21%.

The euro was broadly steady in recent weeks but continued to languish at some of the lowest levels seen in over a year amid weak economic momentum. On 22 March, the currency traded at 1.13 USD per EUR, a 0.5% depreciation from the same day last month. 

Our panel sees the euro ending 2019 at 1.17 USD per EUR and 2020 at 1.21 USD per EUR.

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