Eurozone | Weaker growth in 2H19 on worsening global trade, but also lower domestic demand

Summary

EZ GDP growth is expected to slow slightly further to 0.1% QoQ in 2H19. Available data so far show worsening exports, especially those to other EU countries, and industrial output. There are further signs on more moderate consumption and subdued investment despite improving labour market and favorable financing conditions.

Key points

• Key points:
• EZ GDP growth slowed in 2Q19 driven by the slight contraction in Germany, more vulnerable to worsening global trade and industry, but also subdued investment and slowing consumption.
• Disappointing hard data in 3Q19. Exports have slowed since mid-2018 affected by lower global demand, but those to other European countries have also declined strongly more recently, especially to the UK. Lower trade and higher uncertainty have pulled down the manufacturing sector. In addition, slowing retail sales point to more moderate growth of private consumption.
• Confidence surveys up to September rule out any improvement in manufacturing in the short-term. However, spillover effects to services still remain contained.
• Our MICA-BBVA model now projects EZ GDP to slow slightly further to around 0.1% QoQ in 3Q19. Recent data is still consistent with an annual growth at 1.1% in 2019, but point to a further deceleration in 2020 (slightly below 1%).
• Core and inflation expectations entrench at very low levels so far this year while inflationary pressures are muted leading the ECB to deliver a strong easing package amid heightened downward risks, especially related to a no-deal Brexit scenario and increasing trade constraints.

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