Eurozone: Increasing risks – Danske Bank

Danske Bank analyst’s points out that with the signs of improvement European sentiment indicators, confidence has taken a hit from the renewed escalation of the US-China trade war and potential US-Mexico tariffs.

Key Quotes

“With external demand remaining a headwind, the longevity of the expansion will increasingly depend on developments in domestic demand. In that light it is reassuring that private consumption in Germany jumped by the most in eight years in Q1 and that May's service PMI remained in expansionary territory at 52.9.”

“Another risk relates to the labour market, where manufacturers have reportedly started to reduce staffing in light of weaker sales prospects and rising geopolitical uncertainty. All that leads us to conclude that the euro area will not be able to maintain its current growth pace of 0.4% q/q in the coming quarters, though we remain some way off recessionary territory.”

“As fears about a cyclical downturn in the economy have intensified, market-based inflation expectations have continued to slide.”

“Looking ahead, we continue to find reasons to expect core inflation to trend gradually upwards towards year-end, albeit we acknowledge downside risks to our inflation forecast.”