EU cuts growth and inflation forecasts for 2020

Bloomberg Brussels | Updated on July 10, 2019 Published on July 10, 2019

The European Commission cut its euro-area growth and inflation forecast for next year as trade tensions and policy uncertainty weigh on the region, strengthening Mario Draghi’s case for further stimulus measures.

The latest warning comes just two weeks before the European Central Bank’s next policy meeting, where it may lower interest rates or signal that action is imminent. The fallout from slower global demand was already laid bare this week when German chemicals giant BASF SE shocked investors with a huge downgrade to its profit outlook.

In its quarterly forecasts, the EU’s executive arm trimmed its 2020 euro-area GDP projection to 1.4 per cent from 1.5 per cent amid what it said were increased downside risks. On inflation, both this year and next were lowered modestly to 1.3 per cent. The ECB aims for inflation of just below 2 per cent over the medium term.

The report reflects more pronounced weakness in the region, which has stumbled along with the global economy as trade disputes hit manufacturers and dent broader confidence. As hopes for a stronger second-half performance fade, the Commission said an extended economic confrontation between the US and China and Brexit are threatening the fragile economy.

Many tests

“The resilience of our economies is being tested,” said European Commission Vice President Valdis Dombrovskis.

The EU’s forecasts come in the wake of economic numbers, particularly in Germany, that have added to pessimism about the euro area. All of that is giving ECB President Draghi reasons to follow through his pledge to loosen monetary policy again if the situation does not improve. A survey of investors this week suggested a German recession is likely, and confidence among French manufacturing executives is at its weakest in six years.

Concern about the economy, along with an expectation of ECB stimulus, is pushing bond yields lower across the region. Germany’s 10-year yield is stuck below zero, while even borrowing costs in Italy have fallen despite concerns about the nation’s fiscal situation.

Germany and Italy are projected to have the lowest growth rates in the euro area this year, dragging down the outlook for the rest of the bloc. The bloc’s biggest economy will expand by 0.5 per cent, while Italy is flirting with stagnation at 0.1 per cent. Those numbers are unchanged from May projections, as is the 1.2 per cent forecast for the euro area.

“The rebound anticipated later in the year now looks weaker, as the global manufacturing cycle has yet to bottom out and the outlook for trade and investment continues to be clouded by protectionism and uncertainty,” the Commission said. This adds to concerns about the medium-term outlook in China and the recent intensification of geopolitical tensions in West Asia.

Published on July 10, 2019

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