2019 is getting off to a less strong start, with economic activity having taken a hit from the ‘gilets jaunes’ protest movement. The collapse in consumer confidence has been abrupt and the global environment looks less certain. Against this background, fiscal policy is being loosened: the new plan to support the purchasing power of lower income households, announced in response to December’s demonstrations, should help consumer spending to catch up, at least in part. It comes alongside measures already introduced in the 2018 budget to support consumers and companies. French growth is therefore likely to show signs of resistance.
At the end of 2018, Italy and the European Commission agreed on a new 2019 Budget Law, avoiding an Excessive Deficit Procedure. The 2019 public deficit has been lowered to 2% of GDP from 2.4% previously planned, and real GDP growth has been revised downward to 1% from +1.5%. This is still a challenging scenario as overall conditions in the Italian economy worsened in H2 2018. In Q3, GDP fell by 0.1% as investment, both private and public, significantly declined. After the downturn in September, exports in Italy recorded a +9.6% y/y increase in October, while they stagnated in November bringing the value of the sales abroad to 427 billion euros in the first eleven months of the year.
The current slowdown is in keeping with the European economic cycle. Prospects are still looking relatively good, and Spain’s expected growth rate is among the highest of the big eurozone countries. Unemployment is falling rapidly but it is still massive, especially long-term unemployment. Prime Minister Pedro Sanchez just presented his 2019 budget proposal to Parliament, but he is not sure it will pass. In any case, the deficit most likely slipped significantly below 3% of GDP in 2018, and Spain is preparing to exit the excessive deficit procedure that was launched 10 years ago.
Hungary’s macroeconomic situation provides a good illustration of how Central Europe is flourishing economically, but has jettisoned some of the principles of liberal democracy, which is the crucible of the European Union. Hungary’s real GDP growth is estimated at an average of 4.5% in 2018, the highest level since 2004 and higher than its long-term potential. Endogenous and exogenous factors announce a downturn in the economic cycle in the quarters ahead. Yet there is nothing alarming about the expected deterioration in macroeconomic fundamentals in the short to medium term.
On 15 January 2019, UK MPs rejected the proposed Brexit agreement reached by EU Heads of State two months earlier. With 432 of the 634 votes going against the deal, this result has significantly weakened Prime Minister Theresa May in future discussions with the EU and with Members of Parliament. Today almost anything looks possible, starting with a delay in the official date of the UK’s departure, currently scheduled for 29 March.
Hungary’s Prime Minister Victor Orban, who intends to lead a eurosceptic, sovereigntist and anti-immigration front in European elections next May, can boast of a favourable macroeconomic situation. Economic growth continued to accelerate in 2018 thanks to a mix of expansionist economic policies, European structural funds and an upturn in domestic lending. GDP growth is estimated at an average of 4.5% in 2018, the highest level since 2004 and above its long-term potential. It is expected to slow in 2019. The “Orban model” is striking a fragile balance between interventionism and pro-business measures. A small open economy, Hungary is highly integrated in European and global supply chains and then is dependent on the global business cycle
Market reaction suggests that the parliamentary vote, with a wide majority, against the Brexit deal which had been negotiated with Europe, has reduced the likelihood of a no-deal Brexit. Whether this feeling of relief lasts will depend on how the discussions on possible outcomes evolve. The economic headwind which comes with this prolonged uncertainty, for the UK but also for the companies in the EU which trade with the UK, will not go away soon.
For Germany, 2019 started with a hangover. Most indicators that we follow are below their long-term average and all surprised on the downside. In particular, the export-oriented manufacturing sector has been badly affected.
The European parliamentary elections in May 2019 will mark the start of a major process of renewal for European institutions. After Brexit, the European parliament will have only 705 seats, from 751 at present. Aggregating national polls can help produce projections for the make-up of the new parliament, although naturally these need to be treated with some caution. According to current projection by Poll of Polls, a weakening position for the dominant conservative and social-democrat groupings may be on a sufficient scale to prevent the PPE and S&D alliances from taking a majority in the European parliament. The liberal/centrist ALDE group, if its rising poll numbers feed through into the ballot boxes, hopes therefore to become a supportive force able to forge compromises
