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Eurozone Economic Outlook: Q4 2018

December 2018

The outlook for the Eurozone has continued to deteriorate since August. GDP growth declined to 1.7% year-on-year in Q3 of 2018. Private sector confidence indices have also declined, although they remain above the historical average. Recent declines in Eurozone stock markets also signal significant uncertainty about the region’s economic outlook. GDP growth is forecast to increase by 1.9-2.1% in 2018. Afterwards, output is expected to rise by 1.4-2.2% in 2019 and by 1.1-2.1% in 2020.

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Lost momentum and declining private sector confidence

The outlook for the Eurozone has continued to deteriorate since August. GDP growth declined to 1.7% year-on-year in Q3 of 2018.

The deterioration of the global demand and trade outlook since 2017 has dampened prospects for exports, increasing the reliance on slowing domestic demand for growth. However, consumption growth has been relatively slow, at 1.2% year-on-year in Q3 of 2018.

Private sector confidence indices have declined, although they remain above the historical average.

Recent declines in Eurozone stock markets also signal significant uncertainty about the region’s economic outlook.

GDP growth is forecast to increase by 1.9-2.1% in 2018. Afterwards, output is expected to rise by 1.4-2.2% in 2019 and by 1.1-2.1% in 2020. Growth in 2021-2026 is likely to stay within an average annual rate of 0.8-1.8%, due to slow labour productivity growth and an ageing population constraining employment growth. Baseline scenario probability: 20-30% at 1-year horizon.

 

Baseline Outlook

Lost momentum and declining private sector confidence

Forecast Risks

Brexit crunch time and Italian fiscal policy showdown
Risks remain tilted to the downside
Pessimistic and optimistic scenarios

Aggregate demand and economic activity

Economy has slowed, although still growing faster than the long-term trend
Investment growth remains stronger, but is also slowing
Private sector confidence remains high but declining

Financial markets and monetary policy

Eurozone stocks badly affected by October global markets correction
Monetary policy will remain accommodative in 2019-2020
Sovereign borrowing spreads remain low, with the exception of Italy
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