Perspectives

2020: the year the economy begins to pick up?

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EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
Eurozone  
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020: the year the economy begins to pick up?  
Will the year 2020 be marked by a rebound in eurozone economic growth? More favourable signs seem to be emerging, although they  
have yet to show up clearly in hard data. In any case, eurozone growth is bound to remain low. In this environment, inflationary  
pressures will probably fall short of the central bank’s target. Beyond that, the ECB Governing Council will be tackling new issues in  
2020. Christine Lagarde announced a strategic review for the Frankfurt-based monetary institution. On the agenda: cryptocurrencies,  
climate change, technological progress, and inequalities.  
Without signalling a strong rebound, several factors seem to  
suggest that growth is beginning to stabilise: survey indicators are  
no longer deteriorating in the manufacturing sector; some progress  
is being made concerning US-China trade talks and Brexit; financing  
conditions will remain very accommodative; and the labour market  
remains relatively resilient, despite signs of weakness.  
1
- Growth and inflation  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
2.7  
1
.9  
Growth fails to rebound  
1.8  
1
.5  
1
.3  
1
.1  
1.2  
1.1  
In 2019, the eurozone was hit by a sharp economic slowdown.  
Difficulties in the manufacturing sector that first appeared in the  
second half of 2018 persisted in 2019. Growth displayed a robust  
1.0  
20  
0.8  
0
.4% in Q1 2019 but then decreased to 0.2% for the next two  
quarters. For the full year, our forecast calls for eurozone growth to  
average 1.1%, compared to 1.9% in 2018.  
17  
18  
19  
20  
21  
17  
18  
19  
21  
Source: National accounts, BNP Paribas  
Cyclical and leading indicators nonetheless point to a certain  
stabilisation. The Purchasing Managers Index (PMI) in the  
manufacturing sector is clearly holding below 50, the threshold that  
separates expansion from recession, but at 46.3 in December 2019,  
it no longer seems to be deteriorating. The PMI in services rose to  
2
-Inflation and monetary policy  
---- Real M1 money supply growth (y/y in %, 12-months forward)  
Services PMI (rhs)  
1
4%  
2%  
0%  
65  
52.8 in December, and is robustly holding in expansion territory. So  
1
1
far, fears that the manufacturing sector’s troubles will spread to the  
services sector have failed to materialise. In the months ahead, the  
horizon could clear up somewhat. Real M1 money supply growth,  
the “narrow” money supply aggregate that provides relevant  
60  
8
%
%
55  
6
50  
1
4%  
information on the potential for an economic recovery , is looking  
2
%
%
45  
40  
35  
upbeat (see chart 2).  
0
All in all, eurozone growth is expected to decrease to 0.8% in 2020  
before rebounding in 2021 and converging towards its potential (see  
chart 3). Although household consumption is slowing, it should  
remain relatively robust at a time of ongoing wage growth. On the  
corporate side, investment is still going strong, buoyed notably by  
very favourable financing conditions. Note that the recent upturn in  
long-term rates reflects the renewed confidence of economic agents,  
especially concerning the reduced risk of recession. Yet the upturn  
in interest rates should remain mild in the face of low inflationary  
pressures (around 1% in both 2020 and 2021). As in 2019,  
eurozone fiscal policy is expected to be slightly expansionist at the  
-2%  
-4%  
Source: ECB, Markit  
Note: M1, the narrow money supply aggregate, is comprised of bills, coins and  
demand deposits.  
This scenario presents several risks, and certain indicators will have  
to be monitored closely in 2020. First, as we have pointed out for  
several months now, it is crucial for the labour market to remain  
resilient at a time of slowing activity. Although the sector has been  
hit by a major negative shock for several quarters, industrial  
employment seems to be less dynamic, but continues to progress at  
an annualised rate.  
2
aggregate level in 2020, providing only a timid boost to growth .  
1
R. Fendel et al., Predicting recessions using term spread at the zero lower  
bound: The case of the euro area, VOX CEPR, January 2019  
European Commission, European Economic Forecast - Autumn 2019,  
November 2019  
Eurozone exports must also operate in a persistently weak global  
environment. International trade failed to regain momentum, and in  
2
st  
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EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
October, the volume of global trade contracted for the 5th  
consecutive month. In China, a major trading partner for the  
eurozone, economic activity is unlikely to begin accelerating again  
until the second half of 2020.  
3
-Contribution to eurozone growth by country (% point)  
Germany  France  Italy  Spain  Other  
1
,4  
1,2  
,0  
Lastly, we cannot rule out an external shock. Rising tensions in the  
Middle East could drive up energy prices, for example, while new  
tariffs could erode domestic demand.  
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ECB: a new era  
0,8  
0,6  
Shortly after taking the helm as the new president of the European  
Central Bank (ECB), Christine Lagarde has already made her mark.  
The 12 December speech confirmed our previous expectations:  
ECB monetary policy will probably remain unchanged throughout  
our forecast horizon.  
0
,4  
,2  
0
0,0  
2
019  
2020*  
2021*  
According to the ECB’s latest projections, eurozone growth will  
remain weak in the short term, despite recent signs of stabilisation.  
In the medium term, although there are still high risks surrounding  
growth momentum, ECB staff points out that some of these risks  
could dissipate at least in part (notably concerning US-China trade  
talks). A slight upturn in activity and persistently strong wage growth  
could partially filter through in a pick-up in inflation, and core  
Source: Eurostat  
= forecast  
*
4-Core inflation and interest rates  
--- Core inflation, and ECB projections (%, y/y)  
-
3
---- Deposit facility rate (%)  
inflation could reach 1.6% in 2022 according to the ECB (see chart  
4
4). Yet Ms. Lagarde insisted that this inflation rate would not be  
considered as a reached target”, which reinforces our hypothesis  
that monetary conditions will not be tightened for a relatively long  
period of time.  
3
2
1,6  
1,3 1,4  
In 2020, a key issue to follow will be the opening of the ECB’s  
strategic review, as announced by president Lagarde. Like the US  
Federal Reserve, the ECB is launching a strategic review of its  
monetary policy targets and instruments (at a time when it has very  
little manoeuvring room), but the scope of the review is much  
broader. The Governing Council’s agenda will also look into issues  
relating to cryptocurrencies, climate change, technological progress  
and inequalities. Scheduled to last a year, this strategic review will  
largely dominate discussions between observers.  
1
0
-1  
1
999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021  
Source: European Central Bank (ECB)  
Note = The horizontal green lines represent the ECB’s average annual core  
inflation projections for the years 2020, 2021 and 2022.  
It could also come up against the divisions that have appeared  
within the ECB in recent months, which Ms. Lagarde will have to  
address. The next monetary policy meetings will surely reveal more  
details on these issues.  
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European Central Bank, Eurosystem staff macroeconomic projections for the  
euro area, December 2019  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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