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Eurozone: macroeconomic outlook for 2020 and potential risks

1/24/2020

The eurozone went through a tough year in 2019. In 2020, the economic growth could stabilise, but a strong rebound seems unlikely.

Louis BOISSET

TRANSCRIPT // Eurozone: macroeconomic outlook for 2020 and potential risks : January 2020

Like many advanced economies, the eurozone went through a difficult year in 2019. Annual average eurozone GDP growth should be around 1%, below its potential level. The major economies experienced diverse economic performance: France certainly slowed compared to 2018, but has more or less stabilised since then; Spain continues to grow at a robust but slightly slower pace; Italy still displayed weak growth, while Germany keeps struggling against big troubles in its manufacturing industry.

What to expect in 2020? Although economic activity might have passed the trough, a strong rebound seems unlikely.

In terms of domestic demand, eurozone private investors should continue to benefit from favourable financing conditions. Long-term rates could pick up slightly but this movement is bound to be limited without an upturn in inflation and growth, or new monetary support by the European Central Bank. Private consumption should be still supported by strong nominal wage growth and an unemployment rate that is no longer rising. Overall, the fiscal stance should be slightly expansionist in 2020, like in 2019.

Some of the recent economic good news must be kept in perspective, since it does not eliminate all of the risks surrounding the macroeconomic projections. First, the signing of the phase 1 trade agreement between the US and China marks a relief from rising trade tensions, but probably only a temporary one. Second, Brexit is moving forward and the opening of the transition period signals new tough discussions. Lastly, the expected acceleration in world trade in 2020, which is in line with the economic recovery in some of the emerging countries, needs to be confirmed in the months ahead. All of these factors should bolster the manufacturing sector where activity already seems to have bottomed out. Nonetheless, industrial value added has contracted continuously on a quarterly basis since Q3 2018, and the most recently available economic data point to another decline in manufacturing production. We will be keeping a close eye on this situation in the months ahead, especially in the car sector. For instance, German automobile production hit a low point in 2019. Sluggish external demand, notably from the emerging countries, and the implementation of new European regulations to tackle global warming have been weighing on the car sector. That being said, these new regulations raise many structural questions in the short and even in the medium term:

  • Is the automobile industry able of adapting production by increasing the share of “green” technology, i.e. with low greenhouse gas emissions?
  • Can it make the transition fast enough to avoid the additional financial cost of fines imposed for non-compliance with these regulations?
  • Can automakers’ margins absorb the higher costs associated with adapting production?

For further information, please refer to the macroeconomic forecasts of the BNP Paribas Economic Research team, which will be released very soon in our EcoPerspectives.

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