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%.

REAL SECTOR | Global economic growth moderates in Q4 as uncertainty heightens Global economic growth continued to cool in the fourth quarter of 2018, with aggregated growth hitting the lowest mark in two years. The global economy expanded 3.0% in the fourth quarter over the same period in the previous year according to an estimate produced by FocusEconomics. The print was a notch below the 3.1% expansion forecast in the previous month and Q3’s 3.1% increase. Looking at the economic performance of G7 economies, Q4’s slowdown was mostly led by a sharp deceleration in the Euroarea, which expanded at the weakest pace in over four years in annual terms. Although a detailed GDP breakdown is still missing for the common-bloc, available data suggests that a downturn in the industrial sector and deteriorating economic confidence likely hit domestic demand, while a cooling global economy could have led to a deterioration in the external sector. In Japan, economic growth rebounded in seasonally-adjusted annualized terms (SAAR) in Q4 as the impact of a series of natural disasters in Q3 dissipated. Low business confidence and Brexit uncertainty kept growth subdued in the United Kingdom. Regarding the United States, GDP figures for Q4 have not yet been disclosed due to the government shutdown in December 2018 and January 2019. However, available data for the quarter suggests that growth moderated in SAAR terms in Q4 on the back of less robust private consumption. Data for the first quarter paints a rather gloomy picture for the global economy, with moderating demand impacting industrial activities. Labor markets, however, seem relatively robust worldwide, which should buffer domestic demand. On the political front, President Donald Trump stated on 24 February that the U.S. will extend the 1 March tariff hike deadline on USD 200 billion of Chinese imports, while officials from both countries cited substantial progress in bilateral talks. That said, President Trump did not propose a new deadline and there is widespread skepticism about the depth and scope of the progress, particularly how to ensure compliance with the deal. In the eyes of U.S. government officials, China’s industrial subsidies and alleged espionage, the large trade surplus that the Asian giant holds against the U.S. and intellectual property rights violations in China are the key sticking points. Global outlook stable 2.4 2.8 3.2 3.6 Q1 16 Q1 17 Q1 18 Q1 19 Q1 20 2.8 3.0 3.2 3.4 Oct Jan Apr Jul Oct Jan 2019 2020 World Economic Growth Change in GDP forecasts Note: GDP, real annual variation in %, Q1 2016 - Q4 2020. Note: GDP, evolution of 2019 and 2020 forecasts during the last 18 months. FOCUSECONOMICS Summary FocusEconomics Consensus Forecast | 3 March 2019 While the China-U.S. trade spat appears to be on track for a successful resolution in the near future, the winds of protectionism are gathering strength. On 17 February, U.S. Commerce Secretary Wilbur Ross recommended imposing tariffs on global imports of cars and auto parts; President Trump now has 90 days to decide whether to do so, which could amount to tariffs of 25%. Meanwhile, on 26 February, Theresa May pledged in parliament to allow MPs to vote on whether to delay departure if no deal has been reached by mid-March. MPs will debate the next steps on 27 February; crucially, one amendment likely to be debated could also force the government to request an extension of Article 50.


OUTLOOK | Global economic outlook takes a respite this month The economic outlook was stable this month following last month’s downgrade. While the global economy has entered a soft patch this year, robust labor markets worldwide and supportive fiscal policies are expected to shore up economic growth. Moreover, the U.S. Federal Reserve’s decision to pause its tightening cycle will allow central banks to adopt more accommodative monetary policies. Nevertheless, risks to the global economic outlook are clearly skewed to the downside. Despite President Trump’s plan to delay additional tariffs on Chinese goods, trade tensions between China and the United States remain elevated. Furthermore, the U.S. administration has already threatened its trade partners that new tariffs, this time on cars, are on the table. Meanwhile, China’s economy continues to slow, adding downward pressure on global demand, while uncertainty surrounding Brexit shows no sign of abating. FocusEconomics Consensus Forecast panelists expect the global economy to expand 3.0% in 2019, which is unchanged from last month’s estimate and below the 3.2% increase projected for 2018. The panel sees global economic growth inching down to 2.9% in 2020. This month’s stable growth prospects for the global economy reflects unchanged growth prospects for the United Kingdom and the United States. Conversely, our analysts downgraded their view for Canada, the Eurozone and Japan. Among developing economies, growth prospects in Asia ex-Japan remained stable on hopes that China and the U.S. will be able to clinch a trade deal in the coming months and that policy stimulus will avoid an economic downturn in China. In Latin America, while economic dynamics are expected to improve in 2019, the slow pace of economic reforms in Brazil and widespread political risks are dragging on overall regional growth. Economic growth in Eastern Europe will slow due to headwinds in Turkey, subdued economic activity in Russia and moderating dynamics in the European Union—the region’s main trading partner. Despite bolder fiscal support in the Middle East and North Africa, economic growth will moderate in the region owing to OPEC+ oil production cuts. The economic recovery in Sub-Saharan Africa will continue Change in GDP Growth Forecasts 2019 2020 -0.15 -0.10 -0.05 0.00 0.05 Euro area Japan G7 United Kingdom World United States BRIC China Brazil India -0.04 -0.02 0.00 0.02 Euro area BRIC Brazil G7 United States China Japan World United Kingdom India Note: Change between February 2019 and March 2019 in percentage points. . . Source: FocusEconomics

Growth projected to regain some steam in Q4; crisis-stricken Venezuela groans under oil sanctions Latin America’s bumpy economic recovery is expected to have had a better quarter at the end of 2018, after growth slumped in the third quarter. FocusEconomics estimates that GDP increased 1.7% year-on-year in Q4, above Q3’s 1.5%. Despite the modest uptick, growth remains weak in the Latin American economy, which had a disappointing 2018 overall. Weaker global trade, a noisy election cycle, shifting sentiment for emerging-market assets and one-off shocks in major players caused the recovery to flounder last year. Preliminary data for Mexico revealed that growth lost steam in the fourth quarter. Plunging industrial activity on the back of contractions in the construction and mining sectors dented economic activity, while retail trade figures were more positive. Official GDP figures for the rest of the region’s economies are still outstanding, although FocusEconomics analysts estimate that Ecuador and Uruguay both also lost steam in Q4. Moreover, Argentina’s recession is expected to have deepened as sky- high inflation, falling employment and decimated confidence undermined economic activity. Elsewhere in the region, dynamics are expected to have held up better. A pick-up in Brazil’s economy likely fueled the overall regional acceleration, on the back of a recovering labor market and returning confidence. Peru’s economy is also projected to have bounced back from a poor Q3, thanks in part to soaring infrastructure spending, while growth in Chile is also seen having accelerated in Q4. Growth is seen receding slightly at the start of 2019 and the Latin American economy is seen expanding 1.5% annually in Q1. Signs of a looser monetary policy stance in the United States are supporting sentiment for emerging-market currencies and should help give most central banks more room to encourage economic activity. In addition, the end of the crowded election cycle should allow governments to shift focus to implementing much-needed reforms, although a degree of uncertainty will likely linger until new policies are pushed through. Slower global growth, however, could take some wind out of the region’s external sector this year. On the political front, Venezuela has been in the spotlight in recent weeks after the leader of the opposition-controlled National Assembly, Juan Guaidó, declared himself interim president on 23 January. Several countries, including the United States, have since recognized his presidency, ramping up international pressure on President Nicolas Maduro to resign or hold new elections. Moreover, the United States is using its economic might to squeeze the crisis-stricken country, imposing new sanctions on state-owned oil firm PDVSA. These measures will likely dent oil revenues and further exacerbate the country’s already dire economic condition. The situation is fast-evolving and there is considerable uncertainty regarding the future of the country and whether Maduro will be able to cling onto power. Some of our panelists have begun forecasting a political transition, while there is also the risk that the recent actions by the United States could boost Maduro’s standing in the country.

U.S. sanctions set to exacerbate economic crisis On 28 January, the Trump administration significantly increased the economic pressure on President Nicolás Maduro’s government by announcing sweeping sanctions against PDVSA, the state-owned oil firm. The new measures freeze around USD 7 billion of PDVSA’s assets in the U.S. and would effectively halt Venezuela’s oil exports to the U.S., amounting to USD 11 billion in lost export revenues over the next year. In addition, proceeds from oil sales by PDVSA would flow into designated accounts outside the control of the Maduro government. Considering that the country depends almost entirely on oil exports for its hard currency income, the sanctions deal a serious blow to the government’s cash flow and to the already crippled economy. The U.S. is the main buyer of Venezuelan crude, currently importing around 500,000 barrels per day (bpd). It also exports about 100,000 bpd of diluents to Venezuela, which are needed to mix with its heavy type of oil before it is exported. Under the sanctions, PDVSA would have to seek alternative buyers for its crude, such as in India, and would have to sell at a sharp discount to secure those markets. Furthermore, the cost of importing diluents from elsewhere would rise as Venezuela would lose the price advantage from its proximity to the United States. Consequently, lower revenues stemming from the loss of its main export market, coupled with the higher costs of importing diluents, will severely curtail Venezuela’s capacity to produce, process and export oil going forward. This will have a significant impact on public finances and on the economy more broadly. While previous U.S. sanctions implemented in August 2017 already made it hard for the government to access international financing, the new ones will constrain even further its ability to acquire much-needed hard currency. A major implication is that the Maduro government and PDVSA could struggle to service their hefty foreign debt obligations, which could push them closer into default and in turn put Citgo—PDVSA’s U.S.-based subsidiary and most valuable foreign asset—and other assets at risk of action by creditors. On the domestic front, lower inflows of dollars will further distort the foreign exchange system, as noted by Milton Guzman, analyst at Andes Investments: “Despite the recent effort from the government to apply a more flexible FX scheme, at least, in the next three or four months, the net amount of external resources will be significantly low as to feed up the market in a satisfactory way.” This in turn increases the risk of the exchange rate weakening considerably, which would further fuel hyperinflation. In addition, given the economy is highly import dependent, lower foreign currency revenues means the country will be able to import significantly less, leading to deeper shortages and increased hardship on the Venezuelan population. This was highlighted by Efrain Velazquez, director at AGPV, who commented: “[The sanctions] imply that public imports will have to be reduced. Economic and social impacts will be huge. Food shortages will increase and hyperinflation may accelerate even more.” As such, the sanctions would inflict a heavy toll on the average Venezuelan and could potentially intensify outward migration. Going forward, analysts see the economic outlook deteriorating further, a view that is shared by Velasquez: “Our next macroeconomic projections may show lower GDP growth and higher inflation.” That said, in light of the highly uncertain political environment, others are contemplating various scenarios to play out, like the one illustrated by Guzman: “Since our most recent macro FOCUSECONOMICS Venezuela LatinFocus Consensus Forecast | 113 February 2019 forecast is assuming that a political change would take place between May and June, the sanctions could be lifted, while additional efforts from a transition government to prevent the rapid oil output decline reported since 2017 could also contribute to mitigating the impact of the new sanctions.” Although the sanctions are designed to spark a political transition, which is a scenario that some of our panelists have factored into their forecasts, it is far from certain whether this will be accomplished. By further deteriorating domestic conditions, the measures could even backfire by helping Maduro shore up his support on the ground. All in all, panelists participating in the LatinFocus Consensus Forecast project that GDP will contract 10.3% this year, which is down 0.6 percentage points from last month’s forecast. For 2020, panelists expect GDP to fall 2.8%.

While the economy appears to have ended 2018 on a solid footing, prospects for this year are quickly deteriorating. This is predominantly the consequence of oil production cuts agreed in December among OPEC+ countries, which will drag on GDP growth this year. That said, the oil production caps have started to boost oil prices, which should shore up government revenues somewhat. Moreover, the economy remains constrained by the government’s Saudization policy, which intends to boost the number of jobs for Saudis in the private sector by imposing labor restrictions on foreigners. According to analysts, the amount of expat jobs in the country—especially in the retail sector—declined by around 1.5 million people in the 2017–2018 period; the unemployment rate among Saudis in the same period has nevertheless remained virtually unchanged, hovering around 13%.

Despite greater fiscal support, the economic recovery is likely to lose some steam this year as an uncertain global oil outlook, oil production cuts in compliance with the OPEC+ deal and negative spillovers from the Saudization policy are expected to hit economic activity. Moreover, key economic reforms appear to have stalled, which threatens long-term economic growth in the country. Our panel expects growth of 1.9% in 2019, which is down 0.3 percentage points from last month’s projection, and 2.2% in 2020. Inflation plunged from November’s 2.8% to 2.2% in December, mainly reflecting weaker price increases for restaurants as well as a sharp drop in housing rentals. Inflation should moderate further down the road as the effect of the introduction of a VAT on 1 January 2018 completely fades. FocusEconomics panelists project that inflation will average 2.0% in 2019, which is unchanged from last month’s estimate. Next year, the panel sees inflation at 2.2%. Monetary policy is tied to exchange rate policy and the Saudi Arabian Monetary Authority’s (SAMA) priority is to keep the riyal’s peg against the USD. The country thus follows U.S. monetary policy and, to defend the currency peg, the SAMA hiked its main rates on 19 December after a similar move by the Fed. Saudi Arabia maintains an exchange rate system with full convertibility and no restriction on capital flows. The riyal has been officially pegged to the U.S. dollar at a rate of 3.75 SAR per USD since January 2003 and has had a de-facto peg to the greenback since 1986. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2023.

REAL SECTOR 

PMI moderates in December

The Purchasing Managers’ Index (PMI), sponsored by Emirates NBD and produced by IHS Markit, fell from 55.2 in November to 54.5 in December. Nevertheless, the index remained well above the 50-threshold that indicates expansion in business activity in the non-oil producing private sector. The softer improvement in business conditions reflected weaker growth in output, albeit it remained comfortably above the 2018 average. Growth in new orders softened in December, mostly due to subdued external demand. As a result, employment growth remained weak as it did purchasing activity. Strong competitive pressures continued to squeeze margins, while input prices increased due to higher equipment and raw materials prices. Looking forward, Khatija Haque, head of MENA research at Emirates NBD, commented that: “Business optimism remains strong in Saudi Arabia, and the future output index climbed to the highest reading in five years. 53.8% of respondents expect that output will be higher in 12 months’ time, with no firms expecting a deterioration in conditions.”

FocusEconomics Consensus Forecast panelists see fixed investment rising 5.0% in 2019, which is up 0.5 percentage points from last month’s estimate. For 2020, the panel expects fixed investment to increase 5.4%. The government projects growth of 2.6% in 2019. FocusEconomics panelists project GDP to expand 1.9% in 2019, which is down 0.3 percentage points from last month’s estimate. For 2020, panelists expect the economy to expand 2.2%.

Facing fierce criticism at home and abroad, President Nicolás Maduro was sworn in to serve a new six-year term on 10 January after being reelected in the May 2018 presidential election that was widely condemned as illegitimate. This comes against a dire economic backdrop as the economy remains in crisis with no end in sight. Oil prices slumped after hitting four-year highs in October, which, coupled with faltering oil production—down nearly a third from January 2018 to 1.1 million bpd in November 2018 according to secondary sources—have undoubtedly put a strain on crucial export earnings and government revenues. On a brighter note, in a bid to revamp output, two major oil deals between the state-run oil firm, PDVSA, and U.S.-based Erepla and France’s Maurel & Prom were announced in early-January. Erepla is set to invest up to USD 500 million in three oilfields, while Maurel & Prom would invest USD 400 million for a 40% stake in the Petroregional del Lago joint venture.

The near-term outlook remains bleak, with GDP seen contracting for the sixth consecutive year in 2019. The economy is expected to continue to be crippled by runaway inflation, dwindling oil output and a dysfunctional exchange rate regime. Financial sanctions which hinder the country’s ability to access foreign credit and restructure debt only exacerbate the dire situation. Given the severity of the crisis, conditions may emerge for a political transition, a scenario that some of our panelists have been factoring into their forecasts. FocusEconomics panelists see the economy contracting 9.7% in 2019, which is down 1.3 percentage points from last month’s forecast. In 2020, the panel sees GDP falling 1.4%. • Panelists estimate inflation ended 2018 at over 1,500,000%. Despite the recent currency overhaul and authorities’ pledges to scale back monetary financing, analysts contend the measures are unlikely to tame hyperinflation. Our panel sees inflation surging to over 100,000,000% by the end of 2019, before falling to around 1,500,000% by the end of 2020. • Despite the flexibilization of exchange rate controls under the recent Economic Recovery Plan, the gap between the official and non-official rate continues to widen. The official DICOM exchange rate came in at 862 VES per USD in the 11 January auction, while the parallel market rate fell to 1,890 VES per USD on the same day. Our panelists expect the official rate to end 2019 at 1.8 billion VES per USD before rising to 9.9 billion VES per USD by the end of 2020.

Insight from Focus Economics