Headwinds to European growth

January 2019

Although European stock markets generally rallied in January after December’s sharp falls, investor sentiment was blunted by further signs of economic slowdown. European Central Bank President Mario Draghi warned that economic data had proved weaker than expected, and headwinds to growth have intensified. Italy’s economy slipped into recession during the fourth quarter of 2018.

  • The ECB is unlikely to begin tightening monetary policy until at least the end of 2019
  • Business confidence worsened in Germany
  • Eurozone economic sentiment deteriorated

To view the series of market updates through January, click here.


Although European stock markets generally rallied in January after December’s sharp falls, investor sentiment was blunted by further signs of economic slowdown. European Central Bank (ECB) President Mario Draghi warned that economic data had proved weaker than expected, and headwinds to growth have intensified. In particular, he cited the impact of China’s economic slowdown, the diminishing influence of President Trump’s tax breaks in the US, and the problems faced by Germany’s auto industry. Mr Draghi also highlighted the effects of ongoing Brexit-related uncertainty: while he does not appear to regard Brexit as a major long-term disruptor to the eurozone as a whole, he acknowledged that some countries are more exposed than others to the impact of Brexit. Looking ahead, the ECB appears even more unlikely to consider tightening interest rates until the end of 2019 at the earliest.

“Some countries are more exposed than others to the impact of Brexit”

The International Monetary Fund (IMF) expects economic growth in the eurozone to moderate from 1.8% last year to 1.6% this year, edging up to 1.7% in 2020. The IMF trimmed its forecast for Germany, citing weaker private consumption, soft industrial production and “subdued” foreign demand. Although Germany notched up a ninth consecutive year of positive economic expansion in 2018, the pace of growth slowed down to its slowest rate since 2013. Over 2018 as a whole, Germany’s economy grew by 1.5%, compared with growth in 2017 of 2.2%.

Confidence amongst German businesses worsened in January, according to the Ifo Institute. Business sentiment dropped to its lowest level since February 2016, and business expectations turned negative for the first time since December 2012. The Dax Index rose by 5.8% over January, while France’s benchmark CAC 40 Index climbed by 5.5%.

Italy’s economy slipped into recession during the fourth quarter of 2018. Having shrunk by 0.1% over the third quarter, Italy contracted by 0.2% during the final three months of the year. The eurozone’s economy expanded at a quarterly rate of 0.2% during the fourth quarter, having grown by 0.2% over the previous quarter. The FTSE MIB Index rose by 7.7% during January.

Economic sentiment deteriorated across the euro area during January, particularly within the industrial, services and retailing sectors. The annualised rate of inflation in the eurozone fell from 1.9% in November to 1.6% in December. The ECB has a target inflation rate of below, but close to, 2%.

 

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