Euro Area Economic Forecast

Economic Snapshot for the Euro Area

September 25, 2019

Growth shifted into a lower gear in the second quarter

Headwinds from slowing global growth, trade war uncertainties and issues in the manufacturing sector are seen dragging growth to an over five-year low in 2019. Next year, momentum is expected to be broadly unchanged. Slowing activity in China is expected to weigh on exports, while investment is seen staying soft. Risks linger from trade tensions, a no deal-Brexit and politics.

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

Euro Area Financial & Monetary Sector News

Harmonized inflation was stable at July’s 1.0% in August, remaining at an over two-year low. Inflation remains well below the ECB’s target of under but close to 2.0% amid low expectations and soft pressures from energy. Inflation is expected to remain modest this year and next due to subdued economic activity.

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

The ECB unveiled a batch of stimulus on 12 September, loosening policy for the first time since 2016, as it tries to revive growth and inflation. The ECB decided to cut the deposit rate deeper into negative territory, restart quantitative easing, open up its forward guidance, and change its TLTRO III’s and reserve remuneration. Policy is seen staying ultra-accommodative ahead.

Our panel sees the refinancing rate ending 2019 at 0.00% and 2020 again at 0.00%.

The euro hovered around the lowest levels seen since mid-2017 in September. On 19 September, the currency ended the day at USD 1.11 per EUR, a 0.4% depreciation from the same day in August. Waning economic momentum, muted inflation, ultra-accommodative monetary policy and trade uncertainties have kept the euro weak and these factors are seen lingering ahead.

Our panel sees the euro ending 2019 at USD 1.12 per EUR and 2020 at USD 1.16 per EUR.

 


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