The outlook for the Eurozone & ECB – political risks, manufacturing slump and negative interest
The weakness in the Eurozone economy in the second half of 2018 was expected to be transitory, and a recovery in GDP growth evident in the second half of 2019. So far, there are few signs of this recovery occurring. In this Econosights we look at the outlook for the Eurozone.
Germany is struggling from a weak manufacturing sector, particularly via the negative impacts of the US/China trade dispute.
Political risks around the collapse of the Italian government and Brexit uncertainty will also weigh on Eurozone growth.
There are limits to what the ECB can do to stimulate growth. But expect more stimulus to be announced at the September meeting. We expect a cut to the deposit rate, another round of quantitative easing and dovish forward guidance.
Fiscal policy should be utilised in countries with capacity to lift public spending, like Germany.
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What does this all mean?
Low Eurozone GDP growth is expected to continue for now with trade tensions and political risks weakening growth. ECB policy support, likely to be announced in September, will help stabilise GDP growth but a sharp reacceleration in Eurozone growth is unlikely in the environment of political and trade tensions.
Further monetary easing should benefit European equities in the near-term but more cuts to the negative deposit rate may hurt Eurozone banks because of risks to profitability.