November brought further evidence that the worst of the European manufacturing recession is probably over. The euro area manufacturing PMI rose for a second consecutive month to 46.9 and the German Ifo index showed the economy edging further away from downswing territory. Furthermore, Donald Trump did not decide on whether or not to impose tariffs on imported EU cars before the deadline set this month. Whether or not he has missed the window of opportunity is now a legal question, but to us it seems as if the risk has decreased further after this month's twitter silence. Although it seems like the worst of the manufacturing malaise is over, activity continued to slow in the service sector, setting the scene for anaemic growth around 0.1% q/q in Q4, despite receding risk of recession.

Germany (yet again) avoided slipping into technical recession in Q3, with GDP growth arriving at 0.08% q/q. Private and government consumption as well as a booming construction sector kept growth afloat, as consumers continue to benefit from rising real wages, expansionary fiscal policies and low borrowing costs. Still, the German economy is not yet out of the woods. Global uncertainty is increasingly leading to a wait-and-see attitude among companies when it comes to investment in machinery & transport equipment (of which Germany is a big exporter) and export figures also got an artificial boost from Brexit stockpiling, which we expect to turn into a headwind in Q4. In short, that means the economy continues to ‘flirt' with sub-zero growth in Q4. Our new macro forecasts for both the euro area and Germany can be found here.

Private consumption is currently the ‘lender of last resort' to euro area growth, and judging from the latest developments in negotiated wages – which recorded the highest increase in 10 years in Q3 – this dynamic will not change for the foreseeable future. Core inflation surged to 1.3% in November, however we expect this to be temporary and doubt much acceleration lies ahead. Digitalisation has often been mentioned as a possible culprit for the unattainability of the ECB's inflation target. In Euro Area Research - Inflation's race against the digital machine we take a closer look at the evidence for this claim.

To tackle the task of turning inflation around, Christine Lagarde took the corner office at ECB this month. So far communication from her is that mending the split between her Governing Council members will be her first order of business. Furthermore, she has stepped up the call for more fiscal stimulus from e.g. Germany and seems more committed than her p redecessor of ‘greening' monetary p olicy and the QE p rogramme in the planned monetary strategy review (see FT).

While the ECB's call for more German fiscal easing has so far fallen on deaf ears, a political storm is brewing in Berlin. In a blow to Germany's current grand coalition, Social Democrats (SPD) elected two left-wingers and notable 'Groko' critics as their leaders. With the new SPD leaders seeking a renegotiation of the coalition agreement, the risk of a government crisis and new elections in 2020 has increased, although a final decision over the future of the coalition is only expected after the SPD party convention on 6-8 December.


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