Euro Area Economic Forecast

Economic Snapshot for the Euro Area

May 29, 2019

The economy is seeing slowing in 2019

Flash estimates revealed that growth surpassed expectations in the first quarter of the year, reviving after last year’s sharp slowdown. Although a breakdown by components is not yet available, solid household spending likely supported the result as consumers benefitted from a tightening labor market. In addition, a relatively mild winter may have bolstered the construction sector, while the manufacturing sector is expected to have improved somewhat as one-off issues fade. That said, monthly data still points to soft activity overall and it remains to be seen if momentum will keep pace in Q2. Economic sentiment dropped for the 10th consecutive month in April and the composite PMI continued to point to a two-speed economy in May. Meanwhile, the European parliamentary elections revealed increasing divisions within the union. The vote suggests that the European project will likely remain stuck: with little appetite to move forward or backwards with integration and reforms.

Activity is seen slowing in 2019 as a tougher external backdrop dents exports and hinders investment. That said, the continuation of ultra-accommodative monetary policy, some fiscal loosening and growing wages will act as a buffer. Downside risks loom from an escalation of trade tensions, a slowdown in China, market volatility and lingering weakness in the manufacturing sector.

Our panel left the Eurozone’s outlook unchanged this month after six downgrades, taking a wait-and-see approach after the positive Q1 outturn. Growth is seen at 1.2% in 2019 and 1.4% in 2020.

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Germany Economic Outlook

The economy grew faster than expected in Q1, owing to robust domestic demand and a positive contribution from the external sector despite lingering external headwinds. Upbeat household consumption, amid a tight labor market and easing inflationary pressures, and strong fixed investment powered the domestic economy. Data on the second quarter, meanwhile, is mixed but overall suggests that economic growth remained resilient in the quarter. Consumer confidence stayed elevated through May, and the composite PMI in April–May trended above the Q1 average. On the other hand, business confidence continued to tread water in April and May, and the downturn in the manufacturing sector seemingly intensified in the same period. Meanwhile, the grand coalition has come under renewed pressure after the Social Democrats suffered further electoral losses in local elections in Bremen and the European elections.

Although solid domestic fundamentals should continue to drive the economy, growth is expected to decelerate markedly this year as lingering external headwinds hit the export-oriented sectors. Brexit mystery, slowing Chinese growth, U.S.-China trade tensions and a possible flare-up in U.S.-EU trade tensions all pose downside risks.

FocusEconomics Consensus Forecast panelists expect the economy to expand 0.9% in 2019, which is unchanged from last month’s forecast, and 1.4% in 2020.

France Economic Outlook

Growth held steady in Q1, largely thanks to fiscal measures unveiled to quell the ‘gilet jaunes’ protests, which erupted late last year. Domestically, a tax break and handouts at the outset of the year, coupled with further gains in employment, fostered a rebound in household spending in Q1. Fixed investment, however, softened on lower residential construction activity. Turning to Q2, the announcement of a second round of fiscal stimulus, combined with continued labor market tightening and low inflation, is likely to support consumption. Meanwhile, President Emmanuel Macron’s privatization plans were thrown into doubt in recent weeks after the opposition blocked his proposal to sell the government’s controlling stake in Aéroports de Paris. Macron’s narrow defeat in the European parliamentary elections is, however, likely to encourage him to press on with other sorely-needed reforms.

Growth is seen losing steam this year amid an external-sector slowdown framed by sluggish Eurozone growth and lingering Brexit-linked volatility. Domestically, fixed investment could soften amid political uncertainty, although upbeat consumption, bolstered by Macron’s tax cuts, should buffer any cool-off. Anxieties over fiscal slippage have grown, however.

FocusEconomics analysts see growth at 1.2% this year, which is unchanged from last month’s forecast. Next year, growth is seen picking up to 1.4%.

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Italy Economic Outlook

The economy edged out of recession in the first quarter of 2019, leaving behind two successive quarters of contraction. The expansion, although far from spectacular, was supported by the external sector, while domestic demand dragged on growth. However, the strengthening could prove to be a flash in the pan, given the likely influence of restocking owing to stronger-than-expected growth in the EU in Q1. Available data for Q2 reinforces such calls for caution. In April, consumer confidence slid further, while business confidence resumed the downward path that begun in mid-2018 and had been temporarily interrupted in March. A further slowing in credit growth in March−April and the increase in household savings in the same period both suggest hesitancy from consumers and businesses alike. In more positive news, the stock of banks’ bad debt fell in March following two months of increase.

Withered domestic demand will weigh on the economy in 2019. Muted productivity gains and lethargic job creation will hit private consumption, while political uncertainty and anemic credit growth will hamper capital spending. Given the country’s astronomic debt-to-GDP ratio, a reignition of financial turbulences poses sizable risks to the outlook.

FocusEconomics panelists project growth of 0.1% in 2019, which is unchanged from last month’s projection, and 0.6% in 2020.

Spain Economic Outlook

Preliminary estimates showed that growth quickened to an over one-year high in Q1, contrasting the lackluster performance in the Eurozone overall. The acceleration was largely driven by a solid rebound in fixed investment and a positive contribution from the external sector. Turning to Q2, however, available data has not been as upbeat. In April, the composite PMI declined notably while economic sentiment dipped to an over two-and-a-half year low, indicating softer dynamics in the private-sector economy. On the political front, the investiture vote for Prime Minister Pedro Sánchez is likely to take place in July after his Socialist Party (PSOE) won the 28 April general election. Since then, the PSOE has consolidated its position as the primary political force by scoring important wins in the municipal, regional and EU elections on 26 May. That said, the vote at the subnational level was fragmented, setting the stage for complicated negotiations to form governments at both the local and national stage.

The economy is expected to lose some traction this year as the business cycle matures. Domestic demand is seen driving the overall expansion, particularly private consumption amid sustained employment growth and gradually rising wages. The cooling all-important tourism industry, policy uncertainty and elevated global trade tensions pose downside risks to the outlook.

FocusEconomics panelists project growth of 2.2% in 2019, which is unchanged from last month’s forecast, and 1.8% in 2020.

Euro Area Financial & Monetary Sector News

Harmonized inflation rose to 1.7% in April (March: 1.4%), boosted by the timing of Easter this year. The rise is expected to be transitory and inflation is forecast to remain below the ECB’s target of under but close to 2.0% in the coming quarters despite ultra-accommodative monetary policy and solid consumption.

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

The ECB made no changes to its monetary policy in April, leaving interest rates at record-low levels and maintaining its forward guidance, after having pushed back the timing of a rate hike at its previous meeting. A sharp cool-off in growth and modest inflation have led our analysts to pencil in only a modest hike in the policy rate in 2020.

Accordingly, our panel sees the refinancing rate ending 2019 at 0.00% and 2020 at 0.11%.

The euro is hovering at the lowest levels seen since mid-2017, dampened by global trade disputes and the weak outlook for exports. In addition, political jitters over the European elections as well as concerns in some domestic economies are at play. On 24 May, the currency traded at USD 1.12 per EUR, up 0.2% month-on-month. 

Our panel sees the euro ending 2019 at USD 1.16 per EUR and 2020 at USD 1.20 per EUR.

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