Italy continues to record a cycle of subdued activity, with the annual growth rate of real GDP slightly above zero, as a result of the feeble growth in services, the modest recovery in construction and the persisting contraction in the industrial sector. From Q1 2018 to Q3 2019, manufacturing production has fallen by more than 3%, with the strongest declines in the sector of means of transport, in that of metal products and in that of textile, clothes and leather items. Together with the short term slow down, Italy is going to face long term challenges due to the ageing population and its impact on the labour force and the pension spending.
Although Spanish growth remains solid, it is by no means sheltered from the European slowdown. In 2020, growth is expected to continue slowing to about 1.7%, after reaching 2% in 2019. The slowdown is also beginning to have an impact on the labour market. From a political perspective, Pedro Sanchez was the winner of November’s legislative election, although he failed to strengthen the Socialist party’s position. He was invested as a prime minister in early January by Parliament and he will lead a minority coalition government alongside the extreme left Podemos. The coalition will depend on the implicit support of some regional and nationalist parties, notably the pro-independence Catalan ERC party.
Economic activity may have substantially weakened in Q4, due to the slowdown in world trade and the nitrogen and PFAS problems. Fiscal policy should become very accommodative, although it remains doubtful if the government will succeed in implementing all the spending plans. Growth is likely to slow this year, before picking up in 2021 on the back of a stronger global economy. However, climate challenges and labour shortages continue to weigh on activity in particular in construction. Moreover, pensioners may face severe cuts because of the deteriorated financial situation of the pension funds.
Belgian GDP growth is expected to drop to 0.8% in 2020, down from 1.3% in 2019. Domestic demand remains the key engine of growth, partially offset by a negative contribution from net trade. Private consumption growth is reduced as employment increases now at a slower pace, after 4 strong years. Investment growth is up, spurred on by public expenditures. The lack of a majority-backed government contributed to renewed fiscal slippage, which remains a key risk for the Belgian economy.
Supported by catching-up effects, the Greek economy managed to accelerate slightly despite a slowing European environment. Confidence indices have improved strongly and the Greek state has successfully returned to the capital markets. The new centre-right government is seeking to cut taxes on labour and capital without sacrificing fiscal discipline. The recovery will be a long process, but it is on track.
On 31 January 2020, the United Kingdom will officially leave the European Union and all of its constituent institutions. Brexit will therefore happen in law if not in fact, as, during a so-called ‘transition’ period set to end on 31 December 2020, the British economy will remain a full part of the single market and the European customs union. Goods, services and capital will continue to move freely into and out of the EU, which will continue to have legal and regulatory authority. True separation will only come at the end of this period, once the framework of the future relationship has been settled. As has been the case for some time now, this final step does not look easy to achieve.
GDP growth slowed sharply in 2019, and this trend is expected to be confirmed in 2020. Uncertainty surrounding the business climate and international trade are straining exports and investment. Consumption is barely rising and is unlikely to revitalize growth. Despite this environment, and with inflation near the central bank’s 2% target rate, the Riksbank opted to raise its key policy rate from -0.25% to 0%. Even so, monetary policy is still accommodating.
In a less buoyant international environment, Denmark’s small open economy managed to maintain a rather dynamic pace. Thanks to its sector specialisation (pharmaceuticals, digital, etc.), the economy has been fairly resilient despite the downturn in the global manufacturing cycle. A labour market verging on full employment and accelerating wage growth have bolstered consumption, which is still one of the main growth engines. With the Danish krone (DKK) pegged to the euro, the central bank’s monetary policy will follow in line with ECB trends, and is bound to remain very accommodating. Fiscal policy will be geared towards the ecological targets of reducing greenhouse gas emissions.
The ECB remains cautious in its assessment of the economic situation characterised by risks still tilted to the downside, although less than before thanks to the US-China trade deal. The message is slightly better on underlying inflation where some signs of a moderate increase are noted. Between now and year-end, the strategy review, which has now been launched, will grab a lot of attention, with markets wondering how it could influence monetary policy. The review is also important from the perspective of climate change: will monetary policy operations take it on board as a risk factor or will ambition even be higher?
The most recent economic data in the Eurozone send an encouraging signal. The economic situation remains subdued, and particularly in the manufacturing and export sector, but a start of stabilisation can be expected...
As the unemployment rate stabilises owing to the economic slowdown (14.1% in November 2019), the active population is finally rebounding. This is mainly due to the stabilisation of the number of young workers under the age of 30, after several years of decline. The chart shows that this decline had been strong since 2009. Such a decrease has been observed in the 30-40 years-old age group as from 2011-2012. For the latter group, the decline continues today. Conversely, the labour force over 40 and over 55 years old has never stopped growing, even during the years of crisis. These trends are mainly the results of changes in the participation of various age groups to the labour market
The economic climate in Q4 has hardly changed compared to three months earlier. The weakness is concentrated in the manufacturing sector, where production and orders are well below their long-term average. The growth impetus is coming from the more domestic-oriented sectors such as construction and services. Consumer confidence and retail sales remain well oriented thanks to low unemployment, low interest rapidly increasing wages...
After picking up in October, the credit pulse of non-financial corporates (NFC) in the eurozone dipped again in November. Yet the decline in the private sector’s credit pulse was still very mild, bolstered by the remarkable stability of the credit pulse for households. Recent trends should extend into first-quarter 2020: the banks surveyed expect loan demand from NFC to continue to ease. Inversely, exceptionally low interest rates should continue to boost loan demand from households, mainly for home loans.
Our home affordability index measures the ratio of the borrowing capacity of households (based on average household income, average fixed mortgage rates and average mortgage duration1) to the average existing home price per square meter (m2). Over the past ten years2, home affordability has increased by 30.4% in the provinces, but declined by 12.2% in Paris. Changes in average credit conditions (the average duration was extended to 18.8 years from 17.8 years, and mortgage rates declined to 1.30% from 4.30%) and disposable household income (+7.1%, notwithstanding differences in level) were relatively homogeneous at the national level, which means the differential can be attributed almost exclusively to the spread in existing home prices changes since 2009: home prices have increased by 64
For the first time since 2010, the five major Portuguese banks returned to profitability in 2018. The main factors behind this swing into profits were a faster decline in interest expense than in interest income, and tight control over operating expenses and the cost of risk. The widening of the net interest margin offset the decline in the outstanding amount of bank loans, increasing net interest income. Other things being equal, the decrease of the interest rates also contributed to the reduction in the cost of risk and the clean-up of bank balance sheets. Although the non-performing loan ratio and outstanding amount were halved, they remain at high levels
The UK’s general election on 12 December gave Prime Minister Boris Johnson’s Conservative Party a substantial majority in the House of Commons. The way is now clear for ratification of the Withdrawal Agreement (Brexit) by the UK and the European Union, and this will come into force after the 31 January 2020 at the latest. There will then follow a transitional period, during which the UK and EU will have to determine the framework of their future relationship. However, at just eleven months long, this period threatens to be too short to implement the clean break sought by Mr Johnson. Unless it is to fall back on WTO rules, the UK will only be able to disentangle its links with the EU through a long and delicate process. In effect, Brexit is only at the beginning.
Although not as significant as during the 2004-2007 boom period (+4.8 % per year on average), the dynamism of French business investment has nonetheless been noteworthy since 2014 (+3.4%). In 2018, its contribution to GDP growth (0.5 percentage points) was slightly above the one of household consumption (this latter lacking itself in dynamism) and in 2019, according to our forecasts, it would be barely below. The outcome of business investment being the main engine of French growth is very unusual. Its breakdown by products and its evolution over the time are also noteworthy: the current dynamism is based up to 40% on investment in information and communication services, far above all other products and twice as much as its share during the 2004-2007 period
Danish monetary policy is closely linked to ECB policy so the recent statement of Denmark’s central bank governor that he expects interest rates to remain around current negative levels in the next five to ten years is not without importance for the eurozone. Forward guidance by ECB implies that policy will only be adjusted when justified by economic conditions. The inability to be clearer in terms of time frame illustrates the complexities of inflation dynamics. Past wage increases will gradually filter through in a pick-up in inflation although low inflation, well-anchored inflation expectations and intense competition in certain sectors may very well moderate this transmission. It thus seems clear that the current policy will remain in place for a considerable time
Eurozone GDP growth is causing concern, but the relative resilience of employment continues to surprise. This trend is nothing new. The negative impact on employment of previous crises has been fairly restrained. Despite considerable difficulties in the sector, manufacturing employment is holding up particularly well. The slowdown in productivity gains could, in the short term at least, help drive the growth in jobs. Slower growth in hours worked and low-skilled jobs: a possible labour hoarding phenomenon is under way in Eurozone companies.
The slowdown in economic activity in the Eurozone and inflation structurally below the target rate have raised the spectre of “Japanification”. This would mean effective growth running below potential, very low interest rates and negative inflation. In Japan, this combination of factors resulted from the bursting of the financial and real estate bubbles of the early 1990s. There is a range of factors that could cause “Japanification”. Faced with the challenges of an ageing population and slowing productivity gains, the Eurozone will need to focus its efforts on boosting its potential growth and its resilience to shocks. Short- and medium-term economic policy choices will therefore be crucial in limiting, as far as possible, the risk of “Japanification”.
Most indicators for November surprised on the upside. Despite a string of disappointing data, in particular from the manufacturing sector, GDP actually increased in Q3 by a meagre 0.1%, whereas the consensus had expected a further shrinkage (-0.1%). The main reason was robust growth of private consumption, underpinned strong household confidence levels. GfK indicate that household confidence has remained also very strong in Q4. Also net exports contributed positively to growth, as world trade bounced back. Nevertheless, industrial production remained very weak and the strong rebound in orders in September was the only positive surprise for manufacturers.
The ECB’s monetary policy meeting account illustrates the dilemma it is facing: inflation is subdued and risks to growth are tilted to the downside, yet the financial stability implications of the very accommodative policy need to be closely monitored. These implications are covered in sobering detail in the ECB’s Financial Stability Review. A possible side effect of very low to negative interest rates is that borrowing and spending become more procyclical. Quantitative easing (QE), by modifying the risk structure of investment portfolios (less government bonds and more exposure to assets with a higher risk), will probably increase the sensitivity of portfolio returns to the business cycle.
While many observers have been worried since several months about the health of the manufacturing sector, the activity in services still shows resilience and keeps growing at a pretty decent pace. Nevertheless, the latest economic indicators send a less favourable signal. The Purchasing Managers Index (PMI) for the services sector indeed decreased in November to 51.5 (against 52.2 in October). This level is quite low regarding the historical average. The outlook for economic growth in the coming months, by and large, depends on the resilience of the labour market and the ability to create new jobs.
Automatic fiscal stabilisers help cushion the impact of economic shocks on GDP via changes in government revenues (because of progressive taxes) and expenditures (unemployment insurance). The limited remaining monetary policy leeway in the eurozone is fueling interest in the effectiveness of the automatic stabilisers. European Commission research confirms that, to some degree, automatic stabilisers iron out the impact of negative shocks on GDP. Whether that is enough is another matter. It warrants a debate on the role of discretionary fiscal policy in case of a recession.
Our Pulse indicators leave a misleading negative impression. Indeed, with a 0.3% q/q print in Q3 2019 (first estimate), French growth continues to prove remarkably resilient and stable. And Q4 prospects look similarly positive judging by the October and November results of INSEE business confidence surveys and Markit PMIs. Admittedly, the composite indices were almost unchanged in November but they stand at a relatively high level (105 and 53, respectively). Besides, the headline figures mask more positive details, like, for instance, the improvement in the industry sector (whose confidence index, it is worth emphasizing, stands in the expansion zone contrary to Germany where it is in recession) and the rise in the employment and new export orders components.
