Eurozone | Softer growth ahead on external and industrial weakness and higher uncertainty

Summary

We expect a GDP growth to slow from 1.9% to 1.1% in 2019 and remain relatively stable at 1.2% in 2020 due to easing monetary policy and slightly fiscal stimulus, which should offset shocks from trade war and industrial sector (autos). Risks are tilted to the downside (hard Brexit and increasing global protectionism)

Key points

• Key points:
• Hard data were somewhat disappointing in 2Q19 so far, as bleak export outlook continues to weigh on the industrial sector that contrasts with solid retail sales. Confidence surveys point to some stabilization in manufacturing, but leading components do not suggest activity to gain clearly momentum in the short-term.
• Our MICA-BBVA model estimates GDP growth to have slowed to around 0.2% QoQ in 2Q19 (from 0.4%) and is likely to remain broadly steady in 2H19.
• Against this backdrop, the ECB strengthened its forward guidance on rates (no hikes at least through the first half of 2020) and launched a new series of seven quarterly TLTROs with 2-year maturity from Sep19 and extended reinvestment of QE. We now expect a depo rake cut (-10bps) in 3Q19 along with a tiered deposit system.
• Risks are tilted to the downwards, with a hard Brexit being the more imminent in Europe and increasing global protectionism (also US threats in auto tariffs) from abroad.

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