Euro Area 2020 Macro Outlook

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After an estimated 1.2% in 2019, we expect GDP growth of 1.0% in the euro area in 2020. Country wise, we expect more manufacturing-intense countries to underperform more domestically driven ones. Thus, we project weak growth of 0.7% in Germany and 0.4% in Italy in 2020, while we expect France and Spain to remain relatively resilient, growing by 1.2% and 1.7%, respectively.

Domestic demand, particularly household consumption, is expected to remain the main growth driver next year. Ongoing job creation, combined with rising wages, should continue to underpin household spending. Credit conditions should remain supportive of business investment and construction. Favourable bank-lending conditions and fiscal policy should also support momentum in consumer spending.

Fiscal policy is expected to be mildly expansionary in 2020 in the euro area overall, but with some notable variations. In Germany, we will probably need to see substantial deterioration in the economy before Berlin decides to launch a major fiscal package. Any signs of deterioration in the labour market could be decisive.

The probability of a recession in the euro area in 2020 remains low in our view. We believe that domestic demand should continue to support growth and prevent the economy from slipping into a severe downturn. On the other hand, there are still few signs of a revival in exports. Industrial production is showing signs of stabilising, but the equilibrium remains fragile and will partly rely on political decisions.

While a no-deal Brexit, US import tariffs on EU-produced cars, a worsening of the trade dispute between the US and China, a US recession or another episode of political uncertainty in Italy are not part of our baseline scenario, they do constitute downside risks to our GDP forecasts. By contrast, upside risk could come in the form of a quick easing of trade tensions, a stronger-than-expected recovery in global trade or major fiscal stimulus.

We expect strengthening of wage growth to support a very gradual recovery in core inflation in the euro area. We forecast headline inflation to average 1.2% in 2019 and 1.4% in 2020, with core inflation at 1.0% and 1.2%, respectively.

Barring a large recessionary shock, we expect the European Central Bank to maintain a very loose monetary stance while fine-tuning some of its policy tools. In our baseline scenario, we see no rate cuts in 2020. But the ECB should continue to buy EUR20bn per month of assets as part of its quantitative easing programme, with the asset composition unchanged. A possible strategic review of ECB policy-making in 2020 will also focus attention.

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