Eurozone: lower growth in 2019, some recovery in 2020

According to the Research Department at BBVA, more protracted activity weakness to cause lower growth in 2019, some recovery in 2020.

Key Quotes:

“Weak growth persists in early 2019 as global headwinds (trade tensions, slowdown in main trading partners) and more protracted one-off factors (regulatory changes in autos, protests in France) have weighed on export orders and the industrial sector.”

“Marked deterioration in confidence extended to March, especially in the manufacturing sector, which increased concerns on potential negative effects of higher uncertainty on domestic demand. But hard data for Q1 up to February was better than expected. Retail sales and industrial production rebounded, while exports increased. All in all, we remain cautious due to still gloomier leading indicators. GDP growth is expected to decelerate from 1.8% in 2018 to 1% in 2019, but should gain some traction in 2020 to 1.3%. The strength of domestic factors along with accommodative monetary policy should continue to underpin consumption and investment, while fiscal policy is slightly more expansive.

“Core inflation is still moderate (1%), while the headline rate will slow in coming months driven by energy prices. Tightening labour markets and slight wage pressures might gradually push up of core inflation."

“The ECB strengthened its forward guidance on rates (no hikes at least through the end of 2019) and launched a new series of seven quarterly TLTROs with 2-year maturity from Sep19 to support banks funding. We now expect the first depo rake hike (+10bps) in June 2020 and first refi rate hike (+25bps) in December 2020 (six months later than previously expected). Overall, the tone of the ECB has become more dovish recently.”

“The most immediate risk remains Brexit, as the political deadlock in UK continues and a no-deal exit could not be ruled out. Political uncertainty remains high in several countries and at a broad European level. Other risks include higher tariffs on autos, a US recession and a hard landing in China.”

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