Elections clear way for Brexit
The clear victory of Boris Johnson's conservative Tories in the election means that Brexit is almost certain by January 31, at the latest. The Conservatives should receive 363 seats in the new British Parliament, well above the 326 necessary for an absolute majority. The package negotiated with the EU still has to pass the British Parliament, but with such a clear vote, there will hardly be any dissenters within the Conservative Party.
The risks of a hard break as of January 31 were already low, but are now off the table. For the markets, this should mean a little more confidence in an - albeit slow - recovery of the Eurozone economy. For this reason, we are raising our forecasts for yields on German government bonds slightly during 2020. However, the ECB's purchases of securities should continue to set tight limits on yield increases for the foreseeable future. For the time being, not much will change with the United Kingdom's withdrawal from the EU. In terms of relations with the EU, the status quo is frozen until the end of 2020. Until then, a trade agreement would have to be negotiated; otherwise, the equivalent of a hard Brexit would threaten again, i.e. a separation without a follow-up agreement. This deadline can be extended, but both parties must agree on this by the end of June at the latest. The markets are aware that there are further obstacles ahead. For the time being, however, the relief that the first hurdle has been cleared will prevail.
Improved manufacturing sentiment expected in December
Next week a first flash estimate of the manufacturing sentiment will be released in December for the Eurozone, Germany and France. Sentiment improved for the second month in a row in November, but remained at historically very low levels. Germany continued to be the worst performer in the Eurozone.
Now that an economic upturn is gradually emerging at the global level (supported, among other things, by lower political risks and an easing of monetary policy by the ECB and the US Fed), we assume that the manufacturing sentiment in the Eurozone will continue to brighten in December. In this environment, we expect industrial production in the Eurozone to gradually return to growth in 2020 after the downturn in 2019.
Causes Ireland and investment boom?
Ireland's investments jumped over 200% year-on-year in the 2nd quarter. Behind this are global corporations that transfer assets to Ireland for tax reasons and thus strongly inflate Ireland's investment volume in the short term. This also has a one-off positive impact on investment growth in the Eurozone. This effect has accelerated investment growth in the Eurozone to +5.4% in 2019 thus far (previously +2.4%), although industrial production has weakened sharply over the same period.
Due to this substantial shift in assets, we are raising our GDP growth forecast for the Eurozone in 2019 from +1.1% to +1.2%. For 2020, we expect GDP growth to remain stable at +1.2%.
This document is intended as an additional information source, aimed towards our customers. It is based on the best resources available to the authors at press time. The information and data sources utilised are deemed reliable, however, Erste Bank Sparkassen (CR) and affiliates do not take any responsibility for accuracy nor completeness of the information contained herein. This document is neither an offer nor an invitation to buy or sell any securities.