Europe’s growth is slowing, but not as abruptly as some data suggest. Expansion in 2019 should be supported by rising wage growth and employment plus cheaper oil. And fears of an impending global recession may be overdone: US consumer confidence is at record levels and China is stimulating its economy to prevent a significant slowdown.
The Eurozone’s 0.2% GDP increase in the third-quarter of 2018 was the lowest for four years and well below 2017’s regular 0.7% quarterly rises. This largely reflected contractions in Italy and Germany, where new emission regulations and softer Chinese demand significantly hit car production. Without that, GDP might have risen 0.4%
While the Eurozone is not planning a large fiscal expansion, budget plans suggest its fiscal deficit could increase marginally in 2019 for the first time in 10 years. That’s largely because Italy proposed a 2.4% deficit that breaks EU rules that could likely put it back into the Excessive Deficit Procedure.
However, we think wider slippage means the actual fiscal deficit could widen from 0.6% of GDP in 2018 to 0.9% in 2019. In the face of protests, France has suspended tax rises, for instance, and while Spain proposes a significant reduction, its ability to achieve this remains highly uncertain.
Eurozone unemployment is down to 8.1%, below pre-crisis levels, and pay is finally growing. However, falling consumer confidence means we expect no acceleration in household spending growth. So domestic demand will not offset weaker exports and, as the trade cycle moderates, eurozone business investment growth should also slow, led by Germany.
How will central banks respond? Eurozone inflation should end 2019 at around 1.4%, allowing the European Central Bank to raise its deposit rate by 0.15 percentage points to a still-negative -0.25% next September. But we expect it to extend the targeted operation that provides cheap loans to banks: a credit crunch is the last thing the ECB wants.
The UK is budgeting for an additional £10.1bn of spending in 2019/20, allowing us to raise our growth forecast modestly to 1.6% for 2019 and 2020. Brexit uncertainty continues and lower migration risks causing a labor-supply shortage. Fewer workers means firms may have to pay higher wages, which could lift inflation and lead to higher interest rates.
Europe faces dangers, not least from trade wars. The US accounts for 14% of German and 21% of UK car exports. So tariffs on European vehicles could cause economic damage.
Politically, 2019 is a year of change. Four top EU jobs are set to change hands - the presidencies of the European Parliament, European Council, European Commission and ECB - and it is conceivable that leaderships also change in Spain, Italy, the UK, and even Germany.
Greece, Switzerland and Portugal will hold elections too and Sweden might face another election. With European Parliament elections in May, that’s a lot of political change at a crucial time, particularly when decisive action is needed.
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Simon Wells
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