The Strategist

ECB expects slow pace of economic development in Europe and the US in 2019

09/28/2018 - 12:50

The European Central Bank (ECB) has lowered the forecast for the growth of the euro zone economy due to weak data in the summer of 2018. It is expected now that the growth of European GDP will be lower by 1.7-1.8% than in 2016-2017 until 2021. Weakening of growth is also predicted in Germany due to problems in world trade caused by the changed US trade policy. In the euro area, inflation is also expected to remain relatively weak. At the same time, after the interest rate in the US has been hiked, the US Federal Reserve expects the country's economy to be declining from 2019 to almost the European level in 2021. The global economic summer is coming to an end; its main result is the ever greater resistance of economies to shocks, but not the ability to grow.

The ECB's Economic Bulletin, published on Thursday, revised downward medium-term forecasts of the euro zone’s GDP growth. The ECB's June forecast for growth in Europe was generally optimistic. Now, however, the European Central Bank is inclined to believe that 2016-2017 would be the best in this five-year period. According to the Eurogroup's analysts forecasts, growth of the euro area's quarterly GDP will reach its peak in the fourth quarter of 2018 (0.5%), after which it will remain at a lower level (0.4%) on the forecast horizon until 2020, perhaps later. The annual GDP forecast has been raised to 2% for 2018, however, by 2019-2020 it has been reduced to 1.8% and 1.7% respectively. Against the backdrop of a fairly confident expectation of some acceleration of economic growth in the EU in the summer of 2018, this is the first systemic forecast, suggesting that the EU economy is growing at the peak of its current opportunities and further growth will decline.

At the same time, the German analytical group GB (a joint project of the Berlin German Institute for Economic Research, the IWH Institute in Halle, ifo Institute, the Kiel Institute of World Economics and the Leibniz Institute) has issued its own medium-term forecast, suggesting a slowdown in economic growth for Germany, the key EU economy. The group’s conclusions are similar to the ECB's assumptions: GB analysts suggest that the problems in world trade caused by the aggressive negotiating tactics of the US already create problems for export of the German automotive industry. Thus, Germany's GDP will grow by 1.7% in 2018 - after growing by 2, 2% in 2016 and 2017. The forecast has been lowered rather significantly - by 0.5 percentage points. In 2019-2020, the growth is expected to restore to 1.8% per year thanks to forthcoming fiscal stimulation of the German economy. Nevertheless, GDP growth above 2% per annum in the coming years is not expected for Germany, just like for the entire euro zone.

The difference in forecasts is not so important as such: for example, the ECB obtained tools that allow precise measuring the dynamics of macroeconomic indicators only a few years ago, according to the ECB’s Head Mario Draghi. In general, based on his words, the actions of the ECB, including on the basis of new analytical tools, in 2017-2018 now allow speaking about increased financial stability in the euro area. As an example, the ECB’s Head cited a significant reduction in the OTC derivatives market, including CDS - almost seven times in a decade. In general, the "pause of growth" associated with the European debt problems of 2009-2017, induced stability for the EU’s economies, but not added much to the growth potential.

Bert Colin, senior economist for the euro area at ING, notes that the expectation of some cooling in the euro area began in fact in January 2018. ING, like most analytical centers in the EU, is discussing an unexpected mini-splash of inflation in the euro zone. Basically, it is caused by growth of fuel prices after oil prices. However, based on the ECB’s calculations, the impact on the summer inflation growth in the euro area can also be explained by the import of inflation, as well as calculated core inflation indicators, cleared of fuel and food prices. In any case, with the exception of Germany, where yoy inflation remains above the ECB target at 2% per annum (2.3% in August), the occurrence is unlikely to pose any threat to macro stability. Anyway, trade wars of the US and its partners are likely to affect the future economic dynamics, rather than prices in the EU.

The aforementioned trade wars also seem to have influenced the forecast of US GDP dynamics. Simultaneously with the rate increase, the Federal Reserve System published a new medium-term economic forecast, in which it expects a gradual decline in US GDP growth rates in 2019-2021 to below 2% per annum with a minimal increase in inflation (from 2% to 2.1% in the same years, Core PCE inflation).

So far, it is difficult to say to what extent any agreements of the USA with the EU and China on trade agreements can change the situation. Recall, negotiations in this area are conducted under the leadership of US President Donald Trump in a very aggressive manner. The US administration threatens the trading partners with large losses in case of refusal to reduce trade barriers. Not many people believe in the success of this strategy. Thus, the World Trade Association has lowered its forecast of growth in world trade volumes from 4.4% to 3.9% in 2018 and from 4% to 3.7% in 2019, clearly expecting that liberalization global markets by power will not be successful in the coming years. Recall, export development is still the main driver of the world economy, and all assumptions about accelerating the world GDP growth of the past months were based on this principle.