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Realism Replaces Euphoria for Eurozone as Economists Cut Outlook

Economists have curbed their enthusiasm about prospects for the euro area as a global trade spat amplifies concerns over weakening momentum.

The downgrade to growth projections in the latest Bloomberg survey — on a quarterly and annual basis — comes after the 19-nation region followed its best year in a decade with a stream of disappointing data in 2018. While respondents expect a continuation of the upswing that has created more than 8 million jobs, they no longer see it keeping pace with last year’s 2.4 percent expansion.

After five consecutive increases in the 2018 outlook over the past year, economists cut their forecast to 2.3 percent, reflecting weaker consumer spending and factory activity. They also lowered their estimates for growth in each of the first two quarters by a notch to 0.5 percent.

“The acceleration phase has clearly stopped and risks are to the downside,” said Florian Hense, European economist at Berenberg Bank in London. “But this is not to be confused with a slowdown, the euro zone is on a firm growth phase and, if some these risks do not materialize, we could be in for a rebound in the summer.”

The economy’s softer start to the year has been highlighted by a series of reports from inflation to manufacturing and retail sales, which have all come in below expectations. Protectionist U.S. trade policies threatening a spiral of tit-for-tat responses are adding to uncertainty as the European Central Bank attempts to assess when and how to scale back unprecedented stimulus.

Temporary Soft Patch
“I don’t think we should extrapolate too much on what might be a temporary decline,” said Marco Valli, chief euro-area economist at UniCredit Bank in Milan. “You’re picking up from from a very high level and data suggests the euro zone is growing above potential. There is certainly higher uncertainty, but I don’t think it carries policy implications yet.”

The Bloomberg survey shows interest rates are still seen rising in the second quarter of 2019, with most economists predicting an increase in the deposit rate of 15 basis points, followed by a 10 basis-point hike in the main-refinancing rate later that year. Respondents predict inflation will average 1.5 percent this year and next before ticking up to 1.8 percent in 2020.

Policy makers haven’t lost their optimism yet that broad-based growth will eventually lift inflation toward its goal of below but close to 2 percent, arguing that the direct impact of import tariffs announced by the U.S. and Chinese governments are likely to be small. At the same time, they have warned that consequences may become more serious if a drag on confidence damps spending and investment.

External risks are currently the main source of concern, ECB President Mario Draghi said last week. With domestic fundamentals sound, his chief economist, Peter Praet, said there’s no reason at this stage to change official economic forecasts, while Executive Board member Benoit Coeure argued that any worries about growth are unwarranted because the bloc is simply stabilizing after last year’s pickup.

The Governing Council next meets to set policy on April 26, and updates its economic projections in June.

“Expect the ECB to signal a slight downgrade to the 2018 outlook,” economists at Barclays Plc led by Philippe Gudin said in a note. “This is not to say that the ECB has changed its views on the underlying strength of the euro-area economy, at least we do not believe so. It is rather recognition of the unexpected first-quarter soft patch and the lack of good news on core inflation. It is also a recognition that the global environment has grown more uncertain.”
Source: Bloomberg

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