Europe’s growth is slowing, but not as abruptly as some data suggest. Expansion in 2019 should be supported by rising wage growth and employment plus cheaper oil. And fears of an impending global recession may be overdone: US consumer confidence is at record levels and China is stimulating its economy to prevent a significant slowdown.
The eurozone’s 0.2 per cent GDP increase in the third-quarter of 2018 was the lowest for four years and well below 2017’s regular 0.7 per cent quarterly rises. This largely reflected contractions in Italy and Germany, where new emission regulations and softer Chinese demand significantly hit car production. Without that, GDP might have risen 0.4 per cent
While the eurozone is not planning a large fiscal expansion, budget plans suggest its fiscal deficit could increase marginally in 2019 for the first time in 10 years. That’s largely because Italy proposed a 2.4 per cent deficit that breaks EU rules that could likely put it back into the Excessive Deficit Procedure.
However, we think wider slippage means the actual fiscal deficit could widen from 0.6 per cent of GDP in 2018 to 0.9 per cent in 2019. In the face of protests, France has suspended tax rises, for instance, and while Spain proposes a significant reduction, its ability to achieve this remains highly uncertain.
Eurozone unemployment is down to 8.1 per cent, below pre-crisis levels, and pay is finally growing. However, falling consumer confidence means we expect no acceleration in household spending growth. So domestic demand will not offset weaker exports and, as the trade cycle moderates, eurozone business investment growth should also slow, led by Germany.
How will central banks respond? Eurozone inflation should end 2019 at around 1.4 per cent, allowing the European Central Bank to raise its deposit rate by 0.15 percentage points to a still-negative -0.25 per cent next September. But we expect it to extend the targeted operation that provides cheap loans to banks: a credit crunch is the last thing the ECB wants.
The UK is budgeting for an additional GBP10.1 billion of spending in 2019/20, allowing us to raise our growth forecast modestly to 1.6 per cent for 2019 and 2020. Brexit uncertainty continues and lower migration risks causing a labour-supply shortage. Fewer workers means firms may have to pay higher wages, which could lift inflation and lead to higher interest rates.
Europe faces dangers, not least from trade wars. The US accounts for 14 per cent of German and 21 per cent of UK car exports. So tariffs on European vehicles could cause economic damage.
Politically, 2019 is a year of change. Four top EU jobs are set to change hands – the presidencies of the European Parliament, European Council, European Commission and ECB – and it is conceivable that leaderships also change in Spain, Italy, the UK, and even Germany.
Greece, Switzerland and Portugal will hold elections too and Sweden might face another election. With European Parliament elections in May, that’s a lot of political change at a crucial time, particularly when decisive action is needed.