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Wednesday 27 March 2019
After a long series of disappointments in 2018, Eurozone economic figures have remained very mixed so far in 2019. However, the situation should improve over the coming quarters, thanks to a combination of robust household income, heavy fiscal support, and global trade that is a little weaker than it has been in recent months. Even if there is a slight improvement, there will be no return to the growth figures of 2017, and it won’t happen if serious risks, such as a no-deal Brexit and the imposition of US trade tariffs on European auto imports, come into play. Moreover, the domestic political situation will remain volatile in some EU member-states.
Hopes were high a little more than a year ago, after a tremendous 2017, but the Eurozone economy has delivered disappointment after disappointment since the start of 2018. In last year’s four quarters, GDP expanded by just 1.1% (including just 0.3% in the second half), down from 2.7% in the four previous quarters. Italy slipped back into a slight recession in the second half, and Germany almost did so. Q1 2019 data has been mixed, indicating prolonged difficulties in the manufacturing sector yet a brighter situation regarding services and consumption.
Moreover, household income in recent quarters has been on a steep upward trajectory, with the impact in real terms likely to be amplified in 2019 by the receding in inflation. Even as bad news was piling up on GDP and other economic indicators, the unemployment rate kept declining (to 7.8% in January 2019 from 8.6% 12 months earlier); employment remained strong, albeit slightly less so (1.3% in the four quarters of 2018 vs. 1.7% in the four quarters of 2017); and, most importantly, wages rose by about another 2% last year. All of these figures should mean an increase in real household consumption far above last year’s 1.2%, while year-on-year inflation recedes rapidly under the the base effects of energy prices (even when assuming a slight increase in oil prices this year).
All in all, fiscal support (as measured by the widening in the primary structural deficit) is likely to amount to about 0.5% of GDP for the Eurozone as a whole. As fiscal support is in the form of various measures taken in 2018 in response to each major country’s specific challenges, it will not be as effective as a coordinated stimulus plan. Even so, if we assume a conservative multiplier of a little less than 50%, it should result in an additional 0.2pp of GDP in 2019. However, the effect is likely to fade in 2020, as maintaining such a heavy fiscal boost is not possible under current projections in all countries.
Regarding export momentum, to which the Eurozone is far more exposed than the United States (27% of its GDP vs. 13%, goods and services combined), a slowdown as great as the one in 2018 is unlikely. Our baseline scenario does assume a slowdown in the two major economies and export markets of China and the US, but their growth is still likely to remain much stronger than in the Eurozone. Most importantly, we believe that tensions are more likely to ease than to worsen (at least on the strictly trade front) between these two countries, and that there will therefore be fewer disruptions and uncertainties in global value chains. Lastly, and unlike the previous year, the very poor 2018 figures could give way to a positive payback, notably via restocking.
However, this baseline scenario does not reflect a number of risk factors, which, if they come to pass, could make economic agents more cautious and thus easily cancel out the expected benefits from both gains in household purchasing power and a stabilisation in foreign demand.
In light of the above, the Eurozone’s economic outlook as Q1 2019 draws to a close is, in our view, more positive on the whole than suggested in recent months’ very poor figures. The most likely scenario is a rebound based mainly on household consumption, which itself will be supported by improved resilient job market and fiscal stimulus, and on less negative (while not positive) trends in foreign demand. However, the rebound is likely to remain modest. We forecast GDP growth of 1.2% between Q4 2018 and Q4 2019 and 1.6% during the four quarters of 2020. A return to 2017-like numbers would require a very strong surge in exports – unlikely under current global conditions. Most important, the rebound is exposed to many risks (beginning with Brexit, US protectionism and domestic political uncertainties) on which visibility could be limited over the next few months. What’s more, under a negative scenario, few major instruments of stabilization seem to be immediately available – the ECB’s rates are already zero or negative; and a coordinated fiscal response would be hard to organize.
Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of March 30, 2019.
The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.
This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.
Date of First Use: March 30, 2019.
The ECB and the Fed delivered the same message: they are ready to act "if necessary."
The outlook is somewhat more uncertain than last year due to the rise of protectionism, but we must not sink into an excess of pessimism.
Fed communication has moved significantly towards a much more dovish tone in the past two months. The change in communication has been twofold, both on rates (the Fed became "patient" and "flexible" on the rate outlook) and on prospects for the so-called quantitative tightening (no longer any "autopilot" in balance-sheet runoff). In this piece we focus on the second tool of Fed policy, analyzing rationales and targets behind balance sheet normalization, which have been detailed and widely expressed in recent Fed communication released by Chairman Powell, other Fed governors and the minutes of the January FOMC meeting. An earlier end to "quantitative tightening" (QT) has become likelier, working in combination with a more dovish stance on rates.
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