Euro zone growth, inflation outlook cut as risks from U.S. trade grow

The European Commission lowered its estimates on Wednesday for euro zone growth and inflation, saying uncertainty over U.S. trade policy posed a major risk to the bloc.

In its quarterly economic forecasts, the European Union’s executive arm said prices would grow less than previously predicted, pushing the inflation rate further off the European Central Bank’s target of close to but less than 2%.

The commission confirmed its prediction that economic growth in the euro zone would slow this year to 1.2% from 1.9% in 2018. It also revised down its estimate for next year’s growth, which is now seen at 1.4% instead of the 1.5% forecast in May.

Risks for the bloc have increased, the commission said, and mostly come from “the elevated uncertainty” around United States’ trade policy, as Washington keeps threatening punitive tariffs on a broad range of EU products.

Fears of increased trade tensions “could also trigger a shift in global risk sentiment at times when valuations appear stretched across many asset classes”, the EU economics commissioner Pierre Moscovici told a news conference

“This could lead to rapid tightening of global financial conditions,” he added.

The weaker economic outlook contributed to a downward revision of inflation expectations, the commission said, cutting its estimate to 1.3% for this year and next from the 1.4% it previously estimated for both years.

This year’s forecast matches the ECB’s projection, but for 2020 the commission’s estimate is lower than the 1.4% rate forecast by the central bank in its latest projections, released in June. That could give the ECB a reason to push ahead with fresh stimulus.

The commission confirmed the economic slowdown in the euro zone was mostly caused by weaker growth in Germany, the euro zone’s largest economy, and Italy, its third largest.

German growth will slow to 0.5% this year, in line with earlier predictions, after reaching 1.4% in 2018. Growth is expected to return to 1.4% next year, less than the 1.5% the commission predicted earlier.

Forecasts for Italy remained unchanged, reiterating its economy will barely grow this year, seeing the worst growth rate in the whole EU. Next year’s growth is expected to accelerate to 0.7% but remain the slowest in the bloc.

France’s economy will expand 1.3% this year and 1.4% in 2020, the commission estimated, leaving unchanged its forecast for this year but lowering the estimate for the next, earlier seen at 1.5%.

The commission maintained unchanged its forecasts for Britain, whose economy is foreseen growing 1.3% this year and next. However, the projection does not take into account possible trade disruptions caused by a no-deal Brexit.

Reuters

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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