Outlook Remains Stable Growth slipped in the final quarter of 2019 as the French and Italian economies both unexpectedly contracted. Mo...

Euro Zone Outlook (February 2020)

Outlook Remains Stable
Growth slipped in the final quarter of 2019 as the French and Italian economies both unexpectedly contracted. More broadly, prolonged weakness in the bloc’s industrial sector amid weak external demand, coupled with policy uncertainties at home, have likely continued to constrain growth. Improved economic sentiment and a stable PMI in January, however, suggest momentum strengthened somewhat at the start of 2020. Meanwhile, in politics, Irish voters head to the polls; Slovenia’s Prime Minister resigned on disputes over healthcare funding; Austria’s conservative People’s Party struck an unprecedented coalition deal with the Greens; Pedro S├ínchez was confirmed as Spain’s prime minister; and Italy’s ruling coalition seems to have dodged a government crisis. Moreover, the European Parliament backed Britain’s departure from the European Union, with negotiations now turning to trade talks.

This year, the economy looks set to remain stuck in a low gear. Foreign sales are poised to cool, due to mild global growth and an unsupportive external environment, which will also weigh heavily on investment activity and restrain the industrial recovery. On top of that, interventionist policies in Italy and Spain and trade tensions with the U.S. pose downside risks. Growth is seen at 1.0% in 2020, which is unchanged from last month’s forecast. In 2021, GDP is seen increasing 1.2%

The Eurozone economy slowed sharply in the final quarter of last year, after growth picked up in the third quarter. According to a preliminary estimate released by Eurostat, GDP increased a seasonally-adjusted 0.1% in Q4 from the previous quarter, following Q3’s 0.3% increase. The reading represents the weakest expansion since Q4 2013 and undershot market expectations of a 0.2% increase. Compared with the same quarter of the previous year, seasonally-adjusted GDP expanded 1.0% in Q4, below Q3’s 1.2% increase and marking the slowest growth rate since Q4 2013. Although no details behind the figure are yet available, prolonged weakness in the industrial sector amid global trade tensions, weak demand from key trading partners, and political uncertainty likely hit growth. Additional data showed that Italy’s unexpectedly contracted in Q4, while France’s economy also surprisingly shrunk due to widespread social protests. In contrast, the Spanish economy gained steam; however, a sharp contraction in capital spending and muted private consumption suggest the pick-up will turn out to be temporary. Looking ahead, the economy should gradually gain some strength this year. The manufacturing sector is expected to recover, while private spending will remain solid, benefiting from modest inflation, a relatively low unemployment level and favorable financing conditions. That said, the pace of expansion is expected to be sluggish nonetheless.

Labor market conditions in the common currency bloc improved in December, according to data released by Eurostat. The number of unemployed people decreased by 34,000, and the unemployment rate edged down from November’s 7.5% to 7.4% in December. The figure represents the lowest unemployment rate since May 2008. Looking at the countries with data available, five economies saw their unemployment rates inch down in December, including Spain and the Netherlands. In contrast, four economies saw their unemployment rates rise, while the rest of the bloc saw unchanged labor market conditions—including France, Germany and Italy. 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 (16.6%, data refers to October), followed by Spain (13.7%). At the other end of the spectrum, Germany (3.2%), the Netherlands (3.2%) and Malta (3.4%) have the lowest unemployment rates. FocusEconomics Consensus Forecast panelists expect the unemployment rate to average 7.5% in 2020, which is unchanged from last month’s forecast. For 2021, the panel expects the unemployment rate to also average 7.5%.

Analysis from Focus Economics

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