The Strategist

European Commission downgrades growth forecasts for the euro area

07/11/2019 - 11:25

High level of political uncertainty and slow world trade are key risks for growth of the euro area economies, follows from the updated forecast of the European Commission. These factors have already resulted in a decline in exports and deteriorated industrial business activity, primarily in Germany. As a result, this year the GDP of the area will increase by only 1.2%, and will grow by 1.4% in 2020.

The confrontation between the United States and China, together with increased uncertainty of the economic situation, leads to a deterioration in business activity and has already caused the record drop in leading indexes in recent years, according to an updated economic forecast of the European Commission (EC). Favorable situation in the labor markets of developed countries, the next easing of monetary policy and stimulus measures in China will support growth. However, these factors are not enough to limit the negative effects of trade disputes and political uncertainty in a broader sense.

As a result, global GDP growth will slow down this year to 3.4% (from 3.8% in 2018), and in 2020 it will grow by 3.6%, the EC expects now.

The forecast for growth in the euro area for 2019 has been left unchanged - 1.2%, and for 2020 it has been reduced from 1.5% to 1.4%. For the EU as a whole, the forecasts are 1.4% for 2019 and 1, 6% - for 2020. Inflation is also projected at a low level - in June, the figure was 1.2%, and expectations continue to decline.

The recovery in growth rates in the first quarter (0.4% qoq vs. 0.2% in October-December) was primarily caused by acceleration of growth in Germany after two quarters of stagnation and Italy’s withdrawal from the technical recession. However, the commission considers these factors only temporary. Among the acceleration factors are restoration of car sales as they adapt to the new regulation, as well as growing volume of purchases of goods in anticipation of the UK leaving the EU (the forecast for technical reasons provides for maintaining the status quo). At the same time, quarterly growth in exports was halved - from 1.2% to 0.6% (intra-union trade, on the contrary, grew faster). In the second quarter, indicators already showed weaker industrial activity, especially in Germany.

According to the forecast, Germany’s GDP in 2019 will grow by only 0.5% (1.4% in 2018) and by 1.4% - in 2020. French GDP will rise by 1.3% and 1.4%, respectively ( against 1.7% in 2018), Italy’s GDP — by 0.1% and 0.7% (against 0.9% in 2018).

Escalation of the dispute between the US and China may cause a sharp flight from risky assets, but so far investors are counting on easier monetary policy of both the ECB and the Fed. Due to the returning risk appetite of investors, the required yield on German Eurobonds has been “deeply in the negative zone” since the beginning of May, and the spread to bonds of other euro zone countries is decreasing. The ECB has previously reported on the upcoming additional easing of policy, while the Fed refused to promise to “show patience” in the matter of adjusting rates in a statement following the last meeting. Head of the watchdog, Jerome Powell, also noted that the strong report on the US labor market for June did not change the Fed’s plans. “The most important thing for me is that uncertainty about global growth and trade relations continues to affect the prospects for the US economy,” he said.