Euro Area Economic Forecast

Economic Snapshot for the Euro Area

July 24, 2019

Activity is seen slowing sharply this year

Growth is expected to have lost steam in the second quarter, after a healthy expansion at the start of the year. The latest data continues to point to a two-speed economy, with lingering weakness in the manufacturing sector contrasting relatively robust services sector activity. The manufacturing PMI recorded its worst quarter since Q1 2013 in Q2, and a sharp downturn in industry confidence caused economic sentiment to fall to a near three-year low in June. However, the unemployment rate fell to a new over one-decade low in May and the services business activity index rose to a seven-month high in June. Meanwhile, on 2 July, the European Council nominated Christine Lagarde for ECB President, Ursula von der Leyen to head the European Commission and Charles Michel to lead the European Council. The nominees represent a largely pro-European integration stance and also the continued influence of Germany and France, although ultimately policy will be spearhead by heads of states.

 

Activity is seen slowing sharply this year amid a less favorable external environment, problems in the manufacturing sector and as uncertainty dent exports and investment growth. However, solid spending will curb the downturn. Risks stem from global protectionism, a sharp slowdown in China, resurging financial turbulence sparked by Italy and Brexit uncertainty.

Growth is seen at 1.1% in 2019, which is down 0.1 percentage points from last month’s forecast, and 1.3% in 2020.

Euro Area Financial & Monetary Sector News

Harmonized inflation dropped to 1.2% in May from April’s 1.7%, which was boosted by the timing of Easter. Inflation is forecast to remain below the ECB’s target of under but close to 2.0% in the coming quarters amid low inflation expectations and despite ultra-accommodative monetary policy.

Our analysts see inflation averaging 1.3% in 2019 and 1.5% in 2020.

The ECB pushed back the timing of a possible rate hike at its 6 June meeting, stating that rates will remain at their present levels “through the first half of 2020”. Inflation has remained persistently below the ECB’s target in recent months and is being dampened by low expectations, leading ECB President Draghi to state that the Bank could unleash more stimulus at a speech on 18 June.

Accordingly, our panel sees the refinancing rate ending 2019 at 0.00% and 2020 at 0.04%.

The euro appreciated modestly in June, as expectations of a cut in U.S. interest rates provided some support. On 20 June, the currency traded at USD 1.13 per EUR, which marked a 1.1% gain month-on-month. That said, the euro lies only slightly above May’s two-year lows held back by dovish comments from Draghi and a soft growth outlook. The euro is seen strengthening ahead.

Our panel sees the euro ending 2019 at USD 1.14 per EUR and 2020 at USD 1.18 per EUR.

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Euro Area Economic News

  • Luxembourg: Unemployment stable in July

    August 20, 2019

    In July, the number of unemployed workers stood at 15,668, up 4.2% from June’s result, while the seasonally-adjusted unemployment rate remained stable at 5.5% from the previous months, to match that of the same month last year.

    Read more

  • Eurozone: Inflation falls to over two-year low in July

    August 19, 2019

    Complete data revealed harmonized inflation fell to 1.0% in July from June’s 1.2%, a notch below the preliminary estimate of 1.1% and marking the lowest reading since November 2016.

    Read more

  • Slovakia: Inflation rises to over-year high in July

    August 19, 2019

    Consumer prices rose 0.1% month-on-month in July, matching June’s result.

    Read more

  • Finland: Current account surplus widens in June

    August 15, 2019

    The current account balance improved to a EUR 0.8 billion surplus in June from the revised EUR 0.6 billion surplus in May (previously reported: surplus of EUR 0.3 billion). In the 12 months leading up to June, the current account balance totaled a EUR 1.5 billion deficit, marking an improvement over the EUR 3.4 billion deficit in May. The trade balance improved to a EUR 0.4 billion surplus in June from the EUR 0.1 billion surplus in May.

    Read more

  • Netherlands: Dutch economy outperforms Eurozone average in Q2

    August 14, 2019

    Preliminary data showed that the economy expanded 0.5% quarter-on-quarter in Q2, matching the first quarter’s expansion, supported by rebounding domestic demand and a stronger external sector.

    Read more

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