Perspectives

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EcoPerspectives // 1st quarter 2019  
5
economic-research.bnpparibas.com  
Eurozone  
An anniversary against the background of a slowdown  
After an eventful first twenty years, the eurozone is moving into a new phase of uncertainty. Growth has slowed markedly, and  
economic indicators have deteriorated. With temporary shocks and structural drags on growth, 2019 brings numerous risks. Against  
this background, and faced with underlying inflation that remains too low, the European Central Bank (ECB) is taking a cautious  
approach to this new year.  
2017 already seems a long time ago. Since 2018 began eurozone  
1- Growth and inflation  
growth has been slowing, and recent economic data suggest that  
the slowdown is becoming both more prolonged and more  
widespread.  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
Growing uncertainty  
2.5  
1
.9  
1.9  
GDP grew by 0.2% q/q in Q3 2018, from 0.4% in the first half of the  
year and an average of 0.7% in 2017. International trade was  
responsible for a substantial share of this disappointing performance,  
having made a significant contribution to growth in 2017. The zone’s  
four biggest economies (Germany, France, Italy and Spain) have all  
been affected by the slowdown, albeit to varying degrees. Germany  
and Italy saw negative growth in Q3 2018 (of 0.2% and 0.1%  
respectively), whilst Spain has retained some momentum.  
1.8  
1
.7  
1
.5  
1.5  
1.4  
1
.2  
0
.2  
1
6
17  
18  
19  
20  
16  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
There are several factors to explain this slowdown. First, there is an  
expected and mechanical effect after a particularly buoyant 2017.  
Then there have been temporary localised effects, particularly in the  
German motor industry which has been held back by the  
introduction of new environmental standards. In addition, the climate  
of political uncertainty, particularly with reference to Brexit, is  
affecting both internal and external demand. Lastly, there are  
emerging supply side constraints, with the output gap virtually  
closing in 2017 and an unemployment rate close to its structural  
level. Many companies, especially in Germany, are facing growing  
difficulties in hiring staff.  
2
-Composite PMI  
 Germany  France ---- Italy  
6
0
5
5
50  
The latest economic data suggest that the slowdown is set to  
continue. The purchasing managers’ index for the eurozone  
45  
(
composite PMI) hit a 3-year low in December 2018, at 51.1.  
2
016  
2017  
2018  
Although it remains in expansionary territory (i.e. above 50), its  
services component, which had held up well up until now, has been  
falling for a number of months.  
Source: Markit  
All the major economies saw their PMIs slip during 2018 (Chart 2).  
In particular the French PMI fell very sharply in December in  
response to the ‘gilets jaunes’ protest movement. Meanwhile,  
industrial output fell in November in many eurozone countries, most  
notably in Germany (down 1.9% m/m).  
1
European Union, will hold back growth a little more . A prolonged  
slowdown in growth in China, which remains an important export  
market for the German economy, would also be damaging.  
Germany has contributed nearly half of the eurozone’s growth since  
2010. The main source of support for economic growth is, in the end,  
likely to come from private consumption. Unemployment rates are at  
their lowest for ten years, employment rates are rising and wages  
are continuing to gain ground, albeit at a slower pace than in 2018.  
The economic gloom at the end of 2018 and rising levels of  
uncertainty threaten a sluggish 2019 and a forecasting picture  
ringed around with unknowns. On the trade front, an extension of  
increases in US tariffs, particularly on vehicles imported from the  
1
A. Berthou et al, Costs and consequences of a trade war: a structural analysis,Rue  
de la Banque, Banque de France, n°72, December 2018  
EcoPerspectives // 1st quarter 2019  
6
economic-research.bnpparibas.com  
These trends will support growth through consumer spending, which  
is itself a significant generator of employment .  
3
- Inflation  
Total inflation (y/y)  
--- Inflation excl. energy and unprocessed food (y/y)  
2
The ECB remains cautious  
-
Against this uncertain background the European Central Bank  
ECB) remains cautious and flexible. Having ended net asset  
2,5  
(
purchasing at the end of 2018 and undertaken to reinvest maturing  
securities for a prolonged period, the bank is not putting a stop to  
Quantitative Easing. By maintaining its balance sheet unchanged, at  
around 40% of eurozone GDP, through its reinvestment programme,  
the ECB will maintain a ‘stock effect’ that will continue to put  
downward pressure on long-term interest rates 3 . Monetary  
conditions will therefore remain accommodating.  
2,0  
1,5  
1,0  
0,5  
0,0  
-0,5  
-1,0  
The probability of a rate increase in 2019 is low and remains  
dependent on the sustainable convergence of inflation towards its  
target of 2%. In fact, inflation has fallen (to 1.6% y/y in December  
2013  
2014  
2015  
2016  
2017  
2018  
Source: Eurostat  
2
018, from 1.9% in November, Chart 3), in the wake of lower oil  
4- Per capita GDP in real terms (as % of German per capita  
GDP)  
prices. The underlying inflation figure has struggled to get above 1%  
and for the time being seems unaffected by the marked upturn in  
eurozone wage growth of the past two years.  
France Italy ---- Spain  
1
05  
00  
A brief look back at the expansionist monetary policy pursued since  
Germany = 100  
1
2
014 suggests that it has been positive overall. In particular, the  
9
9
8
8
7
7
6
6
5
risks of deflation, which were very real in late 2014 and early 2015,  
have been avoided. The ECB’s use of non-conventional monetary  
policies and the strengthening of its forward guidance have helped  
consolidate the credibility of its actions and support economic  
activity in the eurozone, notably through the resulting reduction in  
financing costs and support for lending.  
0
5
0
5
0
5
0
20 years on: a difficult convergence  
2
000 2002 2004 2006 2008 2010 2012 2014 2016 2018  
Although monetary policy has helped mitigate the impact of shocks  
since the creation of the single currency 20 years ago, challenges  
remain, notably in the area of real convergence.  
Source: Eurostat, AMECO, BNP Paribas  
Note: For the 2018 annual growth figure accrued growth to end Q3-  
2
018 has been used.  
Since its creation, the eurozone has seen average annual GDP  
growth of 1.4%, but this figure hides some disparities. Germany and  
France have seen similar levels of growth (around 1.4%), whilst  
Spain has grown faster (1.8%) and Italy has struggled (0.4%).  
have continued to grow strongly. In Italy, despite modest population  
growth over the period, per capita GDP has been pretty much  
stagnant on average.  
Despite two deep economic crises, the majority of eurozone  
member countries have significantly higher real per capita GDP than  
in 1999. However, convergence between member states has been  
more mixed. All other things being equal, and using Germany as our  
reference point, per capita wealth has tended to diverge since the  
introduction of the euro (Chart 4). The trend is somewhat different  
for the member states that joined more recently and are still  
catching up economically.  
The divergence relative to Germany nevertheless needs to be seen  
in context. Over the past twenty years German population growth  
has been virtually nil, whilst the populations of France and Spain  
2
R. Anderton et al., Disaggregating Okun’s law - Decomposing the impact of the  
expenditure components of GDP on euro area unemployment, ECB, Working Paper  
Series n°1747, December 2014  
3
J. Dalbard, et al, The end of net asset purchases does not put a stop to quantitative  
easing, Banque de France, December 2018  
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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