Euro Area Economic Forecast

Economic Snapshot for the Euro Area

November 20, 2019

The economy should continue to expand modestly modest in 2020, following a notable deceleration this year. 

Growth held steady in the third quarter, reflecting stable economic performances in the region’s big players. That said, the pace of expansion was modest overall, as the economy was restrained by persistent external headwinds, a weak industrial sector and a cooling labor market. Turning to the fourth quarter, survey-based indicators point to another quarter of sluggish growth. In October, the composite PMI ticked up, although it landed barely above the crucial 50-point threshold. Moreover, economic sentiment plunged to a near five-year low, owing to a broad-based decline in confidence among consumers and businesses. Meanwhile, in the political arena, elections in Spain produced a deeply fragmented Parliament; although the ruling Socialist party struck a deal with far-left Podemos, they still have to find enough support in Parliament and, even if a new government was sworn in, lawmaking would likely be bumpy. Growth is seen at 1.0% in 2020, which is down 0.1 percentage points from last month’s forecast. In 2021, GDP is seen increasing 1.3%.

The economy should continue to expand modestly modest in 2020, following a notable deceleration this year. A challenging external backdrop and weak global growth are set to restrain exports and investment activity. The volatile political environment in Italy and Spain and a possible escalation in trade tensions with the U.S. pose downside risks.

Growth is seen at 1.0% in 2020, which is unchanged from last month’s forecast. In 2021, GDP is seen increasing 1.3%.

Euro Area Financial & Monetary Sector News

Harmonized inflation declined to 0.7% in October from September’s 0.8%, the lowest reading since November 2016, mainly on the back of falling energy prices. Inflation thus moved further below the ECB’s target of below, but close to, 2.0%. Price pressures are expected to remain subdued ahead due to below-potential growth and low energy prices.

Our panel sees inflation averaging 1.2% in 2020 before picking up to 1.4% in 2021.

The ECB held course on 24 October, leaving all interest rates unchanged. The meeting marked the end of ECB President Mario Draghi’s eight-year tenure, who was replaced by former-IMF head Christine Lagarde. The monetary policy stance is expected to remain ultra-accommodative for a protracted period of time due to weak growth and below-target inflation.

Consensus projects the refinancing rate ending 2020 at 0.00% and 2021 at 0.03%.

The euro was little changed over the past month. On 15 November, the currency ended the day at USD 1.11 per EUR, up 0.1% from the same day in October. A high interest rate differential, sluggish GDP growth and trade tensions have kept the euro weak so far this year and these factors are seen persisting into 2020.

Our panel sees the euro ending 2020 at USD 1.14 per EUR and 2021 at USD 1.18 per EUR.

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