Euro Area Economic Forecast

Economic Snapshot for the Euro Area

December 23, 2019

The economy kept pace in the third quarter, although growth was modest. The expansion was underpinned by healthy consumer spending, but restrained by cooling investment activity and an unsupportive external backdrop. Data suggests subdued momentum carried over into the final quarter of 2019. A sharper drop in industrial production in October, weak PMI readings in November−December and downbeat business sentiment in the first two months of Q4 point to protracted weakness, while feebler retail sales and consumer confidence indicate softening consumer spending. On the political front, the Conservative Party’s resounding victory in the UK elections on 12 December signals a clearer Brexit roadmap ahead, reducing related uncertainties. Meanwhile, in mid-November, the European Commission reproached France, Italy and Spain for not adopting meaningful fiscal adjustment, exposing themselves to potential economic shocks.

Momentum is set to remain feeble next year. Soft global growth and an uncertain external backdrop will dent exports and investment activity; smaller job gains, due to rigid labor markets in key countries, will restrain consumer spending; while political uncertainty in Italy and Spain, coupled with Brexit negotiations and a possible resurgence in global trade tensions, cloud the outlook.

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

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