Euro Area Forecast & Analysis, June 2019
Summer is in full swing and so is the geopolitical storm - Chad
Euro Area: ECB pushes back possible rate hike at June meeting The European Central Bank (ECB) turned more dovish at its June monetary policy, responding to the bloc’s softer growth momentum. The ECB pushed back the timing of a rate hike and left interest rates at record-low levels.
Germany: Industrial sector not out of the woods yet Industrial production fell 1.9% month-in-month in April in seasonally- and calendar-adjusted terms, swinging from March’s 0.5% increase. Production in the energy sector was down noticeably; the construction sector, however, provided a small silver lining as production increased marginally.
Greece: New Democracy expected to win general election but slow economic recovery set to continue Polls show that conservative opposition New Democracy (ND), led by Kyriakos Mitsotakis, maintains a sizeable lead over Syriza, signaling that not only will it win the national vote on 7 July but could even secure an absolute majority in the 300-seat Parliament as well. Although Mitsotakis’ victory would imply a shift to a more market-friendly policy mix that may provide a boost to business confidence, the economy’s slow pace of recovery is set to persist in the near-term owing to structural fragilities and authorities’ adherence to strict fiscal targets agreed with Eurozone lenders.
France: Domestic demand propels growth in Q1 France’s economy grew a seasonally-adjusted 0.3% quarteron-quarter in the first quarter. Although first-quarter growth was unaltered from the preliminary estimate, revisions to last year’s fourth quarter—which was revised up to 0.4% from 0.3%— suggest that growth tapered somewhat at the outset of the year.
Italy: Risk of unprecedented fine and resurging financial turmoil elevated The European Commission could launch an excessive deficit procedure against Italy in the next few months for breaking spending and borrowing rules, unless convincing measures are swiftly adopted. The EC tabled a disciplinary procedure against Italy over its failure to comply with the debt reduction benchmark in 2018 and on expectations that the country will not comply with the debt reduction benchmark either in 2019 or in 2020. Second estimate trims Q1’s rebound GDP ticked up 0.1% in the first quarter over the previous period in seasonally- and working-day adjusted terms. The Italian economy returned to growth in Q1, after languishing in technical recession in the last two quarters of 2018, supported by the external sector and by a slight increase in domestic demand net of inventories.
Spain: Composite PMI falls to five-and-a-half-year low in May Largely reflecting slower activity growth in the manufacturing sector, the IHS Markit composite Purchasing Managers’ Index (PMI) declined to a five-and-a-half-year low of 52.1 in May from 52.9 in April.
Italy In Depth:
A second estimate of GDP trimmed down the first quarter’s meager rebound, and revealed a somber picture of the economy. Plunging imports explained the improved performance of the external sector, which boosted the economy out of technical recession, while destocking weighed heavily on GDP growth, as dismal demand prospects prompted firms to lighten inventories. Data for Q2 still points to a limping economy: In April, industrial production contracted again, and the manufacturing PMI remained stuck in contractionary terrain in May. Meanwhile, clouds are forming on the political horizon: On 5 June, the European Commission stated that the opening of an excessive deficit procedure against Italy was “warranted”, due to the country’s high debt load and lack of a credible plan to address it. Although the government stated it will stick to EU rules, and despite some recent budget reprieve hopes which supported Italy’s bond market, the possibility that the Commission could take further disciplinary steps in the months to come remains on the table. The economy is poised to stagnate this year, weighed down by languishing domestic demand and slower growth in the EU. Political and fiscal uncertainty and feeble credit extension will likely depress investment, while consumer spending will be constrained by muted productivity growth and weak job creation. The risk of turbulence in the financial markets clouds the outlook. FocusEconomics panelists project growth of 0.1% in 2019, which is unchanged from last month’s projection, and 0.6% in 2020. Harmonized inflation dropped to 0.9% in May from 1.1% in April. The slowdown came mainly on the back of slower increases in prices for services related to transport, and energy products. Inflation should remain subdued this year, kept in check by anemic domestic demand and stagnant wages. FocusEconomics panelists expect inflation of 0.9% in 2019 and of 1.1% in 2020.
UK In Depth:
The economy has likely lost momentum in the second quarter, after Brexit stockpiling flattered the first-quarter GDP reading. Economic activity contracted sharply in April, albeit in part due to a temporary shutdown at car manufacturing plants. Moreover, the manufacturing PMI dived into contractionary territory in May for the first time in several years on lower export orders. On the flipside, the unemployment rate is at a multidecade low, while wage growth is comfortably outpacing inflation, which is feeding through to solid retail sales. On the political front, the race to choose a new Conservative Party leader—and by extension the next prime minister—continues. Boris Johnson, who has advocated leaving the EU on 31 October with or without a deal, remains the clear favorite. However, all options remain on the table, including a general election, second referendum, leaving the EU with a deal and not leaving at all. This year, muted business investment, coupled with ebbing momentum in key trading partners such as the EU and U.S., will restrain the economy. However, the robust labor market should support private consumption, while a more expansionary fiscal stance should also buttress the economy. The highly uncertain outcome of Brexit remains the key risk to the outlook. FocusEconomics panelists expect GDP growth of 1.3% in 2019, which is unchanged from last month’s forecast. For 2020, panelists see the economy expanding 1.4%. • Inflation decreased to 2.0% in May (April: 2.1%) on softer transport inflation, hitting the Bank of England’s target. Going forward, inflation is likely to dip slightly in H2 amid lower energy prices and mild economic momentum, but stay fairly close to target. FocusEconomics panelists expect inflation to average 1.9% in 2019, which is unchanged from last month’s forecast, and 2.0% in 2020.