EUROZONE: Moderate growth but diverging trends between service and manufacturing sectors

GDP-Growth was stronger than expected in the first quarter of the year (+0,4% Q/Q) due to mild winter conditions and a rebound in car sales. In the 2nd quarter, the GDP slowed down to +0.2% Q/Q.

The short-term outlook for the economy is conditioned by global trade tensions and significant international policy uncertainty, which weigh on the confidence in the manufacturing sector. On the domestic side, a “no deal” Brexit remains a major source of risk.

A resilient services sector turns out to be a growth engine supported by the strong domestic demand (private consumption), which compensates the decline of the manufacturing industries output since early 2018. Such weakness affects particularly the German and Italian manufacturing-intensive economies, whose industrial supply chains are closely integrated and whose export activity is highly exposed in respect to stagnating developments in the USA and in China. A short-term rebound in world trade and impulses for manufacturing from exports and investment are not expected. On the long-term, the economic system will need structural policies that mainly liberate market and innovation forces in industry in order to maintain international competitiveness.

Since 2013, the number of persons employed has increased by 10.8 million to the record number of 159.5 million. The unemployment rate was down to 7.5% in June, almost one percentage point less than a year before, the lowest since July 2008. While nominal wages grew slowly for a long time, they are now picking up momentum and growing at a stronger pace since 2011.

Inflation forecasts have been lowered mainly due to lower oil prices and to a weaker economic outlook. The European Central Bank (ECB) monetary policy should remain highly expansionary for this year and until the European economy is back on a stable growth path. The ECB should not take interest rate measures before 2021.

September 2019