Macroeconomy

Euro growth finishes 2019 on a weak note

Euro growth finishes 2019 on a weak note

Q4 GDP was dragged down by France and Italy. However, while the coronavirus risk needs monitoring, we are leaving our 2020 growth forecast for the euro area unchanged.

Euro area real GDP expanded by 0.1% quarter over quarter (q-o-q) in Q4 2019, the weakest pace since early 2013. Recent leading indicators have provided tangible evidence that the downturn in manufacturing is bottoming and that services remain robust. We believe that the trough for manufacturing was Q4 and that growth should rebound modestly in the coming quarters. The coronavirus and its potential impact on the Chinese economy, a key trading partner for the euro area, remains the main short-term unknown. We are sticking with our 1.0% GDP growth forecast for the euro area in 2020, but with risks tilted to the downside.

 

Data at a country level were very noisy. In France, Q4 GDP growth was significantly weaker than expected, mainly due to destocking, but GDP details were more encouraging. Domestic fundamentals remain well anchored and should continue to support growth this year. We expect household consumption to remain robust. We are keeping our forecast of 1.2% annual real GDP growth for France in 2020

In Spain, in complete contrast with France, the headline GDP figure was strong, but components were less rosy. Nonetheless, we remain cautiously optimistic about Spain. Fundamentals supporting domestic demand remain well oriented. Thus, we are keeping our GDP growth forecast of 1.7% in 2020 unchanged. Last but not least, headline and details were disappointing for Italy, leading to a 0.3% contraction in its economy in Q4. Data put our 0.4% GDP growth forecast for Italy this year clearly at risk of a downgrade, although we are leaving it unchanged for the moment.

 

Core inflation was disappointing, falling to 1.1% y-o-y in January from 1.3% in December. Short term, core inflation is likely to rebound in February. Through the noise, our view remains unchanged. We expect strengthening wage growth to support a gradual increase in core inflation, which we forecast will average 1.2% in 2020 after 1.0% in 2019.

 

Today’s inflation figures do not alter our view regarding the ECB. We expect the central bank to stay on hold in 2020, with the bar for a policy shift remaining high, in our view. We would probably need to see a significant change in economic circumstances, positive or negative, for the ECB to act.

 

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