Eurozone: Expansion has lost momentum but recession discussions are premature - Danske Bank

According to the Eurozone growth outlook presented by Danske Bank analysts, recession discussions are premature and expect the expansion to continue over the next two years, but at a slower pace in light of the maturing state of the business cycle and fading global trade growth.

Key Quotes: 

“We expect GDP growth to reach 1.6% in 2019 (1.7% previously), before easing to potential growth at 1.5% by 2020. Although we expect net exports to exert a drag on growth due to a rougher global trade environment as well as the strong euro in effective terms (having appreciated by around 5% this year), we project domestic demand to make up for the weakness. Especially private consumption growth will accelerate, in our view, driven by rising real wage growth as higher negotiated wages and abating energy price inflation boost households’ wallets. Wage growth is expected to reach 2.4% in 2020, driven by increasing labour shortages and further improvements in the labour market with the unemployment rate falling to 7.5% by 2020.”

“The euro area economy is currently faced with multiple headwinds both internally and externally. The biggest risk, in our view, stems from renewed trade tensions both between the US and EU as well as China, which could further weigh on sentiment and, according to the IMF, dent euro area growth by up to 0.4pp by 2020. However, risks also loom from a disorderly Brexit, renewed EM turmoil and domestic political risks spilling over to tighter financial conditions, notably in Italy. Progress on reforms to strengthen the EMU has been disappointing so far and the schedule risks being further delayed by political uncertainty flaring up again in Germany and European parliament elections looming in May 2019, where Eurosceptic parties are expected to gain even more prominence.”

“The euro area inflation outlook has brightened due to accelerating wage growth and we expect core inflation to continue its gradual upward trend in the coming years.”

“The ECB is slowly exiting crisis mode and we project the first 20bp deposit rate hike by December 2019. In 2020, we expect the ECB to continue its policy normalisation, albeit at a relatively sedate pace.”