Euro Area Growth Downgraded Significantly
As our chart shows, after hitting a post-GFC peak in the third quarter of 2017, growth in the Euro area has been on a consistent downward trend. The synchronised global growth that helped boost European economies has long faded, revealing the lack of domestic demand. For some time, we have raised concerns that these economies were at risk and that investors and policymakers were too sanguine about the situation. After the ECB’s significant downgrade in economic forecasts, it seems policymakers and investors are starting to wake up to this risk, but our concerns have not been mollified.
In our view, the likelihood of growth in 2019 hitting the ECB’s forecast of 1.1% is low given the current level and trend. Such a recovery would necessitate a turn in growth, with stabilisation followed by a reversal, within a handful of months. Moreover, the ECB has very limited tools to provide monetary support while individual countries carry large public debts, making a fiscal boost more difficult. A large stimulus in China would certainly support the Euro area, given its interconnections with the Chinese economy, but policymakers there appear to be hesitant to provide a massive boost as the private sector remains heavily indebted. For now, our concerns persist.
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