Called-off hard Brexit improves outlook

The struggle for the United Kingdom's withdrawal from the EU is going into extra innings. The package negotiated with the EU has yet to be approved by the British Parliament, with new elections scheduled for December 12. Whether government formation and majority voting for the package will run out by the new deadline of January 31 is more than questionable, from our point of view. What is crucial, however, is that the probability of a hard Brexit, which was our original baseline scenario, has been significantly reduced by the negotiated agreement.

With a hard brexit off the table for the foreseeable future, we have slightly raised our GDP forecast for the Eurozone for 2020 from +1.0% to +1.2%. Since Brexit will nevertheless remain unresolved for some time to come, we expect growth in the Eurozone to continue to be dampened in 2020. In addition, there is still the danger that the sharp downturn in German industry could have a more severe impact on the domestic economy with a time lag in 2020. In Q3, GDP growth in the Eurozone stabilized at +0.2% q/q. Leading indicators this week have been mixed. While German exporters' expectations rose sharply, the general economic climate in the euro zone (ESI indicator) dropped in October to its lowest level since early 2015. At the global level, however, there are reasons that justify cautious optimism about the growth outlook. The announcement of a partial settlement between China and the US in the trade conflict is likely to have been the main trigger for this.

The unlikelihood of a hard Brexit also allows us to change our forecasts for the interest rate and currency markets. A further cut in the ECB's deposit rate has become unlikely. We therefore do not expect the ECB to take any further steps in the foreseeable future. The economic upturn we expect next year will not be enough to trigger a change in monetary policy either. For German government bonds, we no longer expect a sideways movement over most of 2020, but a slow rise in yields. However, the boost to yields from the economic recovery should remain limited by the continued excess liquidity in the market, which will continue to rise as a result of the ECB's new QE. The dollar should already have reached its peak and the euro should rise slowly from now on. Following the latest interest rate decision in the US, there is now no interest rate fantasy on either side of the Atlantic for the foreseeable future. However, the Eurozone economy has more potential to benefit from the improved environment than the US economy. Together with the current high valuation of the US dollar, this suggests that the euro is slowly strengthening.

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