Euro zone economy to rebound next year, but inflation won’t accelerate

The euro zone economy will rebound next year from a slow-down in 2019 and unemployment will fall further, but inflation is likely to stay at this year’s levels and below the European Central Bank’s target, the European Commission said on Tuesday.

The European Union’s executive arm said in a quarterly economic forecast for the EU’s 28 countries that euro zone gross domestic product would grow 1.2 percent this year, slower than 1.3 percent seen in February, and well below the 1.9 percent growth in 2018. But it will rebound to 1.5 percent in 2020.

Unemployment in 19 countries sharing the euro is to fall to 7.3 percent next year from 7.7 percent expected this year.

“In 2020, adverse domestic factors are expected to fade and economic activity outside the EU to rebound, supported by easing global financial conditions and policy stimulus in some emerging economies,” the Commission said.

Euro zone inflation is to stay below the ECB’s target of below, but close to 2 percent, as despite the faster growth next year, prices would grow only 1.4 percent, the same as this year.

The ECB expects euro zone inflation at 1.2 percent this year and 1.5 percent in 2020 and has already announced plans to provide even more stimulus through a new round of ultra cheap loans to banks to help the economy.

As a result of the slowdown this year, the aggregated budget deficit of the euro zone will rise to 0.9 percent of GDP from 0.5 percent last year, and stay at 0.9 percent in 2020.

Those with budget surpluses like Germany and the Netherlands will cut them, the Commission forecast, but those with deficits already close to the EU ceiling of 3 percent like France and Italy, are likely to break that limit this year or next, setting themselves up for a clash with the EU executive. [B5N1XP020]

Aggregated euro zone debt is to fall to 85.8 percent of GDP this year from 87.1 percent last year, and decline further to 84.3 percent in 2020, with Germany moving below the EU ceiling of 60 percent of GDP this year for the first time since 2002.

The debt of the most highly indebted Greece, which last year emerged from its third euro zone bailout, is to fall to 174.9 percent of GDP this year from 181.1 percent last year and to 168.9 percent in 2020.

French debt is likely to rise this year and ease marginally in 2020, while Italy, unless it changes policies, will go against the European trend and see its already second largest public debt rise to 135.2 percent of GDP next year. [B5N1XP020]

But the Commission also said there were “pronounced”£ risks to these forecasts.

“On the external side, these include further escalation of trade conflicts and weakness in emerging markets, in particular China. In Europe, we should stay alert to a possible ‘no-deal Brexit’, political uncertainty and a possible return of the sovereign-bank loop,” Commission Vice President Valdis Dombrovskis said in a statement.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell