EU Economic Outlook 2019-2020 - EUROFER
The EU economy slowed considerably in the third quarter of 2018, recording its weakest growth performance in four years. GDP grew by just 0.2% quarter-on-quarter in the Euro area and by 0.3% in the EU. Detailed figures for the main expenditure components show that growth in investment and exports slowed down rather sharply, whereas private consumption and government consumption expenditure continued to grow at the same quarterly growth rate as in the first half of 2018. The disappointing performance of the EU economy in the third quarter of 2018 can be attributed to a combination of various destabilising factors. Slowing global economic growth and rising protectionism had a negative impact on international trade. Moreover, activity in the EU automotive industry – particularly in Germany – slumped due to a surge in sales ahead of the introduction of new emissions and fuel efficiency measurement rules. Since Germany is more dependent on international trade than most of its EU counterparts, weakening industrial activity was a key factor in German GDP posting a 0.2% quarter-on-quarter decline. Italy also registered negative GDP growth in the third quarter, in a reflection of generally weak economic fundamentals and political uncertainty.
CONFIDENCE INDICATORS
Forward looking indicators for the EU have deteriorated noticeably over the past few months.
The latest monthly business and consumer survey conducted by the European Commission reveals a broad-based decline in sentiment in December 2018, due to confidence in industry, services, construction and among consumers edging lower in all major euro area economies. Industrial confidence fell back to the lowest level in two years as companies become more pessimistic in their assessment of order books, production expectations and stocks of finished products.
The IHS Markit Eurozone Composite Output Index showed the same trend. The December reading was down to 51.1, the lowest level of the index for over four years, with underlying readings for the manufacturing and the services sectors moving in tandem. A key factor in the weakening survey results was the marked deterioration in the assessment of new orders and order books.
The drop in confidence levels across EU countries and key sectors basically reflect increasing threats from global protectionism, financial market volatility due to the normalisation of interest rates, political instability related to the ‘yellow vests’ protests, Brexit and a darkening outlook for global economic growth. The surveys also signal that the corporate sector in particular does not foresee a short-term improvement in business conditions, which could have a negative impact on investment going forward.
Available data for the fourth quarter of 2018 confirmed the continuation of weakening industrial momentum in the EU. The growth in manufacturing activity in the EU slowed from 3.2% in the first quarter, to 1% year-on-year in the third quarter, and came to a standstill in October, followed by a reversal into negative growth in November. in Germany the drop in activity was particularly notable.
Chances of the EU economy having moved up a gear in the final quarter of the year are therefore slim. However, owing to the relative strength of economic growth in the first half of 2018, growth over the whole year will not deviate significantly from earlier projections. EU GDP growth is estimated to have amounted to 2% in 2018.
ECONOMIC FUNDAMENTALS Headwinds for the trade sector are expected to ease somewhat in 2019 and 2020 after the disappointing year 2018 when exports suffered from a weakening global environment and an escalation in protectionist measures. The problems in the automotive sector exacerbated this negative impact, especially on Germany.
The weakened euro should be a supportive factor over the coming quarters, especially if recent signs of a stabilisation of international trade conditions are not just temporary.
Nevertheless, the EU economy is expected to remain largely dependent on the strength of domestic demand.
The outlook for private consumption is moderately positive, though it remains on a slowing growth trend. The continued recovery in the EU labour market – as reflected by the one percentage point reduction in the EU unemployment rate in the 12-months period since November 2017 should provide support to wage growth. In combination with inflation trending lower from its peak in October, the outlook for household spending is moderately positive. Private consumption growth is forecast to be 1.6% in 2019 and 1.6% in 2020.
The outlook for investment is surrounded
by an elevated degree of uncertainty. An increasing number of companies in the EU and abroad is becoming more pessimistic in its assessment of order intakes and production expectations.
In Europe, manufacturing activity growth has stalled, thereby relieving pressure on existing capacities and, as a consequence the need, to invest in new capacity. Several large companies have recently lowered their profit forecasts, announced redundancies and/or postponed investment plans due to increased market volatility in the face of rising protectionism and still largely unknown risks related to Brexit. This is particularly true for the automotive sector. Both Jaguar Land Rover and Ford have announced job cuts and cost saving plans, which will not only affect their UK-based plants but also subsidiaries and suppliers on the continent.
On the positive side, cost of financing is still low and access remains easy. While the European Central Bank (ECB) put an end to its net asset purchases at the end of 2018, further steps in policy tightening will depend on its assessment of economic conditions and inflation. For the time being, no major changes in monetary policy are to be expected. Despite stalling growth in industry, capacity utilisation in the manufacturing and construction industry remains higher than in recent years. The weaker euro should strengthen the competitiveness of euro area manufacturers abroad.
Nevertheless, stability and predictability of the business environment are important factors in investment decisions. The risk of international trade frictions escalating further and rising uncertainty related to a no-deal Brexit could act as a drag on investment and lead to lower investment growth than currently forecast in the base-case scenario: 2.4% in 2019 followed by 1.8% in 2020.
GROWTH OUTLOOK FOR 2019-2020
Hard data and forward-looking indicators appear to suggest that the EU economy has entered the late-cycle phase of the rebound that started in 2014. Economic fundamentals should remain supportive to continued – but slowing – growth in domestic demand and, to a lesser extent, to international trade in 2019 and 2020. Nevertheless, several factors could lead to a faster and more severe reversal of economic conditions than currently expected and could even cause the EU economy to slide into an early recession. The greatest risks stem from a global economic context which has become more uncertain due to rising extra-EU protectionism, potentially leading to a further escalation of trade tensions between the US and its trading partners. Other risks include the increased volatility in financial markets and the particular vulnerability the emerging economies to a deterioration in financial conditions, as well as geopolitical instability. All in all, the balance of risks has clearly shifted to the downside in recent months.
EUROFER’s first quarter 2019 forecast for EU GDP growth is 1.7% in both 2019 and 2020.
Source : Strategic Research Institute