EUROZONE: Is the Economy Moving Towards Recession?

In a deteriorating economy context, the elections of the European Parliament in May will determine the next political leadership while a new president of the European Central Bank (ECB) will be nominated by October 2019. According to analysts, a central budget capacity would be necessary to promote a harmonized fiscal policy that should include public investments in education and infrastructure (e.g. industry digitalisation) in order to contribute to a long-term improvement of the productivity growth. The GDP growth continued to slow in the 4Q 2018 (+0.2 y/y). In a future perspective, domestic demand remains the main growth driver, while the economic activity might be hindered by a slowing foreign demand (e.g. from China) triggered by the uncertainty regarding international trade conflicts. The uncertainty about a possible disorderly UK exit from the European Union (EU) persists and could negatively impact trade relations and business investments.

The PMI in the industry fell under the growth threshold (49,3) for the first time since 2013. The wage growth trend since the beginning of 2018 has not affected the inflation rate (Jan. ’19: 1,4%), which is expected to remain on the medium-term below the 2% target level set by the ECB. ECB’s reference interest rates remained unchanged at 0% in March and should remain at their present levels along 2019. In case of economic weakening, the ECB would have no margin to reduce interest rates; a new widening of its balance sheet would thus be difficult.
Even though real interest rates are slightly negative and credit costs are low, the transmission mechanism did not generate the expected level of investment credits.

April 2019