Venezuela Stand Off Far from Over

The political standoff between President Nicolás Maduro and Juan Guaidó, who declared himself interim president on 23 January and has been recognized as such by more than 50 countries, is far from over. Following the unsuccessful attempt by Guaidó and his allies to deliver aid into the country on 23 February, the opposition leader embarked on a support-seeking tour across the region before returning to Venezuela without incident on 4 March, despite breaking a court-imposed travel ban, to continue pressing on President Maduro to step down. Meanwhile, the diplomatic and economic pressure continues to mount as the U.S. announced new sanctions targeting high-profile figures in the Venezuelan government and military. This follows the painful sanctions imposed on the all-important oil industry in late-January, which have led government officials to scramble in seeking alternative markets to sell crude and securing access to its gold reserves as well as much-needed foreign currency. The latest power outages, which have been running for nearly a week, complicate matters further as they are set to impact oil operations and disrupt day-to-day economic activity.

The outlook is grim. On the one hand, the political situation remains in limbo, with the Maduro government likely opting to wait out the crisis while Guaidó strives to keep up the momentum. On the other hand, financial sanctions aimed at choking off the government’s access to external financing and its oil revenues inflict more damage to an already crippled economy besieged by run-away inflation and goods shortages. The possibility of political change has increased amid the latest events, a scenario which some of our panelists have factored into their forecasts. FocusEconomics panelists see the economy contracting 12.4% in 2019, which is down 2.1 percentage points from last month’s forecast. In 2020, the panel sees GDP falling 2.5%.

Panelists estimate inflation to have ended 2018 at nearly 1,300,000%. Last year’s monetary reconversion has been unable to tame hyperinflation while sanctions are set to worsen goods scarcities going forward, further fueling inflationary pressures. Our panel sees inflation surging to over 70,000,000% by the end of 2019, before falling to around 1,500,000% by the end of 2020. Despite the sharp devaluation of the currency in late-January which brought the official rate roughly up to par to the black market’s, the differential between the two has started to widen yet again. The official DICOM exchange rate came in at 3,300 VES per USD in the 8 March auction, while the parallel market rate fell to 3,603 VES per USD that same day. Our panelists expect the official rate to end 2019 at 243 million VES per USD, before rising to 1.1 billion VES per USD by the end of 2020.


Euro Zone Economics

Flash estimates revealed that the Eurozone economy remained stuck in a low gear in the fourth quarter. Growth was unchanged from Q3’s pace, which had marked the slowest expansion in over four years. While a detailed breakdown of the drivers is not yet available, soft domestic dynamics likely hobbled the economy amid a downturn in the industrial sector and deteriorating confidence. Available data for this year tells a similar story. Economic sentiment dropped to an over two-year low in January, and the manufacturing PMI fell into contractionary territory in February for the first time since June 2013. A high degree of uncertainty also continues to plague the growth environment. A confidential report by the U.S. Commerce Department released in February is expected to have cleared the way for President Donald Trump to levy tariffs on EU automobiles if a favorable trade agreement is not struck. Meanwhile, the Brexit deadline inches ever closer without a clear plan for the UK’s exit. • A soft end to 2018, weaker economic sentiment and ongoing problems in the manufacturing sector are dampening the outlook for the Eurozone this year. Sluggish global trade and geopolitical uncertainty are also seen dragging on growth in 2019, although a tight labor market and accommodative monetary policy should provide some relief. FocusEconomics analysts expect growth of 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, growth is seen stable at 1.4%. • Harmonized inflation eased to 1.4% in January, down from December’s 1.5% and below the ECB’s target of under, but close to, 2.0%. Fading effects from higher oil prices are putting downward pressure on inflation. Our analysts see inflation averaging 1.4% in 2019 and 1.6% in 2020. • The ECB stuck to its plan at the latest monetary policy meeting on 24 January, despite the weak incoming economic data. The ECB held interest rates unchanged and reiterated guidance that it will keep rates at current levels until at least the end of summer. That said, the ECB’s assessment of the Eurozone economy was more downbeat. The next meeting is on 7 March. Our panel sees rates remaining low amid contained inflation and moderate economic activity. The refinancing rate is seen ending the year at 0.04% and 2020 at 0.32%. • The euro was broadly stable in recent weeks but is still hovering among the lowest levels seen in the past year and a half. On 22 February, the currency traded at 1.13 USD per EUR, down 0.2% from the same day last month. Our panel sees the euro ending 2019 at 1.18 USD per EUR and 2020 at 1.22 USD per EUR. Outlook moderates LONG-TERM TRENDS | 3-year averages Angela Bouzanis Senior Economist Euro area 2015-17 2018-20 2021-23 Population (million): 335 337 338 GDP (EUR bn): 10,856 11,946 13,054 GDP per capita (EUR): 32,409 35,452 38,609 GDP growth (%): 2.1 1.6 1.4 Fiscal Balance (% of GDP): -1.5 -0.9 -1.1 Public Debt (% of GDP): 88.6 84.2 80.0 Inflation (%): 0.7 1.6 1.7 Current Account (% of GDP): 3.1 3.0 2.6 1.0 1.4 1.8 2.2 2.6 3.0 Q1 16 Q1 17 Q1 18 Q1 19 Q1 20 1.3 1.6 1.9 2.2 Oct Jan Apr Jul Oct Jan 2019 2020 Change in GDP forecasts GDP, evolution of 2019 and 2020 forecasts during the last 18 months. Economic Growth GDP, real annual variation in %, Q1 2016 - Q4 2020. -1 0 1 2 3 Q1 16 Q1 17 Q1 18 Q1 19 Q1 20 Euro area G7 1.4 1.5 1.6 1.7 1.8 Oct Jan Apr Jul Oct Jan 2019 2020 Change in inflation forecasts Inflation, evolution of 2019 and 2020 forecasts during the last 18 months. Inflation Harmonized Consumer Price Index (HCPI), annual variation in %, Q1 2016 - Q4 2020. FOCUSECONOMICS Euro area FocusEconomics Consensus Forecast | 18 March 2019 REAL SECTOR | Second estimate confirms stalled economy in Q4 A second flash estimate confirmed weak growth dynamics in the Eurozone economy at the end of 2018. According to preliminary figures released by Eurostat, GDP increased a seasonally-adjusted 0.2% in Q4 from the previous quarter, matching Q3’s result which had marked the slowest growth rate since Q2 2014. The reading also matched the first preliminary estimate. Compared with the same quarter of 2017, seasonally-adjusted GDP expanded 1.2% in Q4, down from Q3’s 1.6%. Accordingly, growth slowed to 1.8% in 2018, from 2017’s robust 2.4%. While a breakdown by components is not yet available, soft domestic dynamics likely weighed on growth in the fourth quarter. The Eurozone’s industrial sector floundered, with industrial production recording the largest contraction since Q1 2013 in Q4. A feeble recovery in automobile production following the implementation of new emissions tests in Q3 hampered the result, while a slowdown in emerging markets, geopolitical concerns and other temporary shocks further hobbled the recovery. In addition, economic sentiment deteriorated notably in Q4, despite a tightening labor market. Additional data released by national statistical institutes across the Eurozone painted a weak picture of growth. Germany’s economy narrowly avoided a technical recession in the fourth quarter, eking out zero growth. Italy’s economy, however, did slip into technical recession in Q4, while growth held up in France despite the onset of the ‘gilets jaunes’ protests. The ECB sees the Eurozone economy growing 1.7% in both 2019 and 2020. FocusEconomics Consensus Forecast panelists expect the Euro area economy to expand 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, panelists expect the economy to also expand 1.4%. 

REAL SECTOR | Composite PMI recovers somewhat on services activity in February Leading data suggests that the Euro area’s economy remained soft in February. The Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, edged up to 51.4 from January’s 50.7—which had marked the worst result since July 2013. Despite the rise, the PMI still recorded one of the worst readings seen in the past five years. The composite PMI lies just above the 50-threshold that separates expanding business activity from contracting in the Eurozone. The services PMI rose in February, driving the composite PMI’s marginal gain. However, the manufacturing PMI plunged into contractionary territory, recording the worst reading in over five years. New orders fell at the sharpest pace in nearly six years in the manufacturing sector, and output also recorded a steep decline. Employment, however, was a bright spot in the survey, increasing in the services sector and remaining steady in the manufacturing sector, while business sentiment was mixed across sectors. Regarding the two largest Eurozone economies, Germany’s composite PMI revealed diverging dynamics in the region’s largest economy as the service sector recorded a marked acceleration in activity, while the manufacturing sector nosedived into contractionary territory. In contrast, France’s composite PMI was broadly stable. Elsewhere in the region, output growth dropped to the lowest level seen since November 2013. Purchasing Managers’ Index Note: Markit Purchasing Managers’ Index (PMI) Composite Output. A reading above 50 indicates an expansion in business activity while a value below 50 points to a contraction. Source: IHS Markit. 50 52 54 56 58 60 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Gross Domestic Product | variation in % Note: Quarter-on-quarter changes of seasonally-adjusted GDP and year-on-year variarion in %. Source: Eurostat and FocusEconomics Consensus Forecast. 1.1 1.7 2.3 2.9 -0.5 0.0 0.5 1.0 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Quarter-on-quarter s.a. (left scale) Year-on-year (right scale) % % FOCUSECONOMICS Euro area FocusEconomics Consensus Forecast | 19 March 2019 FocusEconomics Consensus Forecast panelists expect fixed investment to grow 2.5% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, panelists see fixed investment increasing 2.3%. 

REAL SECTOR | Industrial output contracts for second consecutive month in December Industrial output fell again in December, contracting a seasonally-adjusted 0.9% over the previous month. The result followed November’s stark 1.7% decrease and undershot market expectations of a softer 0.4% drop. Industrial production figures have been notably weak since Q3 2018, fueling a broader downturn in the Eurozone economy. The contraction was driven by shrinking production of capital good and non-durable consumer goods. In addition, energy output all fell mildly, while production of intermediate goods was flat in December. Looking at the individual economies for which data is available, 9 economies saw industrial production drop in December, including Italy and Spain. However, industrial production rebounded in France and Germany. On an annual basis, industrial production contracted 4.2%--the worst reading since November 2012. In 2018, industrial production grew 1.0%, a stark deceleration from 2017’s 3.0%. FocusEconomics Consensus Forecast panelists see industrial production expanding 0.4% in 2019, which is down 0.9 percentage points from last month’s forecast. For 2020, panelists see industrial production growing 1.1%. 

REAL SECTOR | Unemployment rate stable in December According to data released by Eurostat, labor market conditions in the common currency bloc were broadly stable in December. The number of unemployed people decreased by 75,000, and the unemployment rate was unchanged at November’s 7.9% in December. The result remains the lowest unemployment rate since October 2008. Looking at the countries with data available, seven economies saw their unemployment rates drop in December, including Italy and Spain. In contrast, Latvia, Lithuania and the Netherlands saw their unemployment rates edge up. Despite a large overall improvement in the Eurozone over recent years, disparities in the labor market among core and periphery countries persist. Greece is the economy in the Eurozone with by far the highest unemployment rate (18.6%, data refers to October), followed by Spain (14.3%) and Italy (10.3%). At the other end of the spectrum, Germany (3.3%) and the Netherlands (3.6%) have the lowest unemployment rates. FocusEconomics Consensus Forecast panelists expect the unemployment rate to average 7.8% in 2019, which is unchanged from last month’s forecast. For 2020, the panel expects the unemployment rate to average 7.6%. 

OUTLOOK | Economic sentiment falls to over two-year low in January Economic sentiment in the Eurozone continued to drop in January, starting 2019 on a poor note. According to the European Commission (EC), the economic sentiment index (ESI) came in at 106.2 points, down from the revised 107.4 points in December (previously reported: 107.3 points) and the worst result since November 2016. January’s reading undershot market Unemployment | December 2018 Note: Unemployment, % of active population. Data for Estonia and Greece refer to November. Source: Eurostat. Germany Netherlands Malta Estonia Austria Luxembourg Slovenia Ireland Belgium Slovakia Lithuania Portugal Finland Latvia Euro Cyprus France Italy Spain Greece 0 5 10 15 20 Industrial Production | variation in % Note: Month-on-month var. of seasonally-adjusted industrial production and annual average growth rate in %. Source: Eurostat. 0.8 1.4 2.0 2.6 3.2 3.8 -2.0 -1.0 0.0 1.0 2.0 3.0 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Month-on-month s.a. (left scale) Annual average (right scale) % % 

FOCUSECONOMICS Euro area FocusEconomics Consensus Forecast | 20 March 2019 expectations of a softer fall to 106.8. Nonetheless, sentiment in the Eurozone remains elevated above the long-term average. January’s downturn was driven by lower confidence in the industrial, services and retail trade sectors. In contrast, consumers became more upbeat at the start of the year along with the construction sector. Employment plans were mixed across sectors: worsening in the industrial and services sectors but improving elsewhere. Economic sentiment decreased in most member countries, including majorplayers Germany and Italy. Notably, data for Ireland was included for the first time in the European aggregates by the European Commission in January 2019, leading to revised historical data. FocusEconomics Consensus Forecast panelists expect private consumption to grow 1.4% in 2019, which is unchanged from last month’s forecast. For 2020, the panel expects private consumption to rise 1.4% again. 

MONETARY SECTOR | Inflation eases to nine-month low in January According to complete data released by Eurostat on 22 February, harmonized inflation came in at 1.4% in January, below December’s 1.5% and matching the preliminary estimate. January’s result marked a nine-month low. Inflation sits below the European Central Bank’s target rate of near, but under, 2.0%. Lower price pressures for energy as the impact from higher oil prices faded drove January’s fall. Annual average harmonized inflation was unchanged at December’s 1.8% in January. Core inflation, meanwhile, crept up to 1.2% from 1.1% in December. On a monthly basis, harmonized consumer prices plunged 1.1%, which followed the 0.1% decrease seen in December. Among the countries in the common-currency bloc, Greece (0.5%) and Portugal (0.6%) recorded the lowest inflation in January. On the flipside, Estonia (2.8%) and Latvia (2.9%) experienced the highest price pressures. Regarding the largest economies in the Eurozone, inflation fell in France (1.4%), Italy (0.9%) and Spain (1.0%) in January, but was stable in Germany (1.6%). The ECB sees harmonized inflation averaging 1.6% in 2019 and 1.7% in 2020. FocusEconomics Consensus Forecast participants expect harmonized inflation to average 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. For 2020, panelists expect harmonized inflation to average 1.6%.