The European Commission says an Italian economy close to stagnation and significantly weaker momentum in Germany will weigh on growth in the euro area this year.
The Commission predicts the euro-area economy will expand 1.3% this year, down from 1.9% projected in November. For 2020, it sees growth at 1.6%.
The eurozone economy grew at the weakest pace in four years in 2018 as Italy slipped into recession. A further slowdown is likely this year as the currency area faces growing political tensions and the threat of weaker demand for its exports from China and the UK.
The UK is set to leave the European Union on March 29 – most likely in a no-deal Brexit – which could cause severe disruption to eurozone exports. There’s almost a one-in-three chance of a UK recession in the 12 months, according to a Bloomberg survey of economists.
Germany’s economy stagnated at the end of 2018, trailing most of its peers in the euro area, and continued trade tensions mean any pickup in Europe’s powerhouse economy could be muted.
While Germany narrowly avoided a recession, it fell to others to drive euro-area growth, which came in at 0.2% in the fourth quarter.
China’s economy could slow more sharply than expected if a trade dispute with the US isn’t quickly resolved, further weakening its imports from Germany. While Italy’s sales to China are less significant for its economy, Germany is its largest export market.
Last month, the International Monetary Fund downgraded its global growth forecasts for 2019 and 2020 due to weaknesses across the eurozone and in some emerging markets, according to its chief economist Gita Gopinath.
Global economic growth is now projected to be 3.5% in 2019 and 3.6% in 2020, representing a 0.2 and 0.1 percentage point decline from forecasts made in October last year.
The IMF forecasts for advanced economies in the euro area have taken a substantial hit: Germany’s expected growth has been slashed to 1.3% for 2019, from an earlier estimate of 1.9%. The IMF has attributed this to production challenges in the automotive market and a decline in external demand.
Eurozone confidence has also been weakened by political tensions. Elections for the European Parliament are expected to produce gains for anti-establishment parties, increasing uncertainty about future economic policy.
JP Morgan estimates that the share of lawmakers from anti-establishment parties could rise to almost a third of the total, from a fifth now.
While European Central Bank President Mario Draghi and colleagues have acknowledged the weakness and lowered their expectations for the outlook, they also point to rising wages and job creation as reasons for optimism.
Despite the ECB’s upbeat projections, there’s a danger the slowdown might turn into a recession, Europe’s third in a decade. The ECB, for sure, is also constrained by a monetary policy run for 19 countries with contradictory needs.
But with Europe’s economic and political situation looking increasing fragile, the ECB could play a crucial part in preventing a disaster.
