Fra BNP Paribas:
KEY MESSAGES
In our view, the eurozone is facing more than just a cyclical slowdown;
it faces a comprehensive challenge to its postcrisis export-led growth model. We therefore maintain our negative view on eurozone growth, even in the absence of any further escalation in the USChina trade conflict or other major risks such as a no-deal Brexit or US car tariffs.
We do not expect the economy to return to its past trend growth rate as persistent uncertainty has affected confidence and manufacturing weakness is hurting the wider economy. We think the ECB will have to deliver 10bp of cuts in September, and the lack of improvement in growth bolsters the case for more easing later on.
We remain below consensus on eurozone growth. Our central forecast is 1.1% in 2019 and 1.0% in 2020, absent any of the major risks materialising, including our expectation
that the US-China trade dispute will not escalate after this weekend’s G20 meeting.
We do not expect the eurozone to return to its previous trend growth rates. Looking through the near-term volatility in the data, there are increasing signs that the softness in
manufacturing is beginning to hurt the rest of the economy: domestic demand has slowed; services activity is being eroded; some leading indicators of the labour market are
beginning to turn; and uncertainty is likely to weigh on hitherto resilient investment.
We think the eurozone’s post-crisis growth model has run its course. More fundamentally, the current environment of deglobalisation does not just threaten the eurozone’s traditional exporter, Germany. The entire eurozone is now an export-oriented economy. Following the eurozone crisis, peripheral economies pursued internal devaluation and turned a current account surplus – a growth model that has now run its course.
Weak growth perpetuates low inflation. Low inflation persists in the eurozone, as inflation dispersion across components has declined, prolonging the period of abovetrend growth required for a sustained convergence towards the ECB’s target, which is unlikely to be achieved anytime soon, in our view.
We expect more ECB easing. We expect the central bank to reintroduce an easing bias into its forward guidance in July, and cut the deposit rate by 10bp in September. With slow
growth bolstering the case for further easing,
