eu commission spring ez gdp forecast review
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GERMAN WEAKNESS TO SLOW EZ GROWTH
  • 2019 EZ GDP Growth Forecast Cut To 1.2pct From 1.3pct
  • 2020 Growth Seen At 1.5pct vs Previous Estimate Of 1.6pct
  • Downside Risks “Remain Prominent”
  • 2019 German GDP Growth Forecast Slashed to 0.5pct From 1.1pct
  • 2019, 2020 Inflation Projected At 1.4pct

 

Frankfurt, 7 May (LS NEWS) – The European Commission lowered its Eurozone growth expectations for the current year and slashed its 2019 forecast for Germany as it warned of multiple threats to the economy. The euro fell against the dollar before erasing most of the losses later in the session, and the 10-year Bund yield lost ground on the news.

 

“Substantial downside risks to the growth outlook remain in place,” the commission said. “The recent slowdown in global growth and world trade, together with high uncertainty about trade policies, is weighing on prospects for GDP growth in 2019 and 2020.”

 

The commission eased its Eurozone GDP growth expectations for the current year to 1.2pct—the expansion rate in the first quarter—from the February estimate of 1.3pct, which was cut dramatically from the 1.9pct forecast issued in November. The commission said it expects economic activity in the single-currency area to expand by 1.5pct in 2020, a decrease from its February forecast of 1.6pct.

 

Oxford Economics Eurozone Economist Ángel Talavera said: “The forecasts did not incorporate the latest Q1 GDP numbers, which turned out to be a bit better than their expectation. In that sense, the downward revisions mostly reflect a catching up to what private forecasters already expected given our more timely forecasts.”

Source: EU Commission
Source: EU Commission

Germany To Slow Dramatically, Italian Outlook To Trouble Rome


The commission said GDP growth this year in Germany, Europe’s biggest economy, will fall to 0.5pct, more than halving its February estimate of 1.1pct.

 

In its Spring Report, the commission said problems at German carmakers continue to linger: “The slump in the automotive sector deserves special attention not only because of its direct role in depressing euro area manufacturing output in 2018, but also due to its potential for spillovers given the highly complex, cross-border and cross-industry supply chains of the car industry.”

 

Commerzbank Economist Christian Melzer agreed that the car sector continues to drag on the German economy. “The question is how bad is it?"

Source: EU Commission
Source: EU Commission

“We expect more growth from the Eurozone this year because we also expect more growth from Germany this year.” Melzer predicted an GDP increase of 1.3pct for the euro area, and 1.0pct for Germany, double the commission’s forecast.

 

German Q1 GDP data is due on 15 May, the same day the EU issues its next estimate for the period. Melzer said he expects a minimum quarterly growth rate of 0.3pct for Germany.

 

He said German growth for the quarter can be calculated by looking at the Eurozone number and results from member states. “The GDP numbers from the other major counties—France, Italy, Spain—show that Germany was already not all that bad in the first quarter.” The German economy stagnated in the fourth quarter of 2018 after a contraction in the previous three months.

 

Talavera singled out the commission’s projections for Italy. “To me the most important number from today’s release is the view on Italian fiscal numbers, which not only see overall deficit rising to 3.5pct of GDP next year but also the structural deficit surging as well. This is quite a heavy blow for the Italian government and one of the reasons that underpins our view that bond yield spreads are going to remain high for the time being.”

 

The commission said it expects the growth slowdown in the Eurozone to bottom out this year. “As global trade and growth are expected to remain weaker this year and next compared to the brisk pace seen in 2017, economic growth in Europe will rely entirely on domestic activity. More Europeans are now in work than ever and employment growth is expected to continue, albeit at a slower pace. This, together with rising wages, muted inflation, favourable financing conditions and supportive fiscal measures in some member states, is expected to buoy domestic demand.

 

Wide Range Of Issues Threaten Rebound

 

“The risk of protectionist measures worldwide and the current slowdown in world GDP growth and trade could turn out to be more persistent than expected, particularly if growth in China disappoints,” the commission noted. “In Europe, risks include that of a ‘no-deal' Brexit and the possibility that temporary disruptions currently weighing on manufacturing could prove more enduring. There is also the risk that a rise in political uncertainty and less growth-friendly policies could result in a pull-back in private investment.”

 

The reduction of the EU's Eurozone economic growth projections brings them closer to the latest forecasts from economists and international organisations. The European Central Bank cut its GDP outlook for this year to 1.1pct from 1.7pct in March. Facing a further loss in economic momentum, rate-setters promptly announced that they planned to extend their delay of a rate hike to the end of this year.

 

The commission’s latest Eurozone growth prediction for the year is now below the International Monetary Fund’s April forecast of 1.3pct.

 

The commission cut its euro area inflation forecasts to 1.4pct in both 2019 and 2020, down from 1.8pct for this year and 1.6pct next year.

 

--- Eric Culp

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