ECB Needs a Year of Two Halves Amid Elusive Pickup in Growth

(Bloomberg) -- Go inside the global economy with Stephanie Flanders in her new podcast, Stephanomics. Subscribe via Pocket Cast or iTunes.

European Central Bank policy makers looking for a recovery need to pin their hopes on a year of two halves as the economy shakes off the doldrums of a global slowdown.

While some of President Mario Draghi’s colleagues lack faith in the prospects of a pickup, the formal view held by officials clings to optimism. That would see the present period, dominated by confidence-sapping trade tensions and a slump in manufacturing, giving way to an improvement later in 2019.

ECB Needs a Year of Two Halves Amid Elusive Pickup in Growth

There’s been much to test policy makers’ hopes -- not least further declines in sentiment indicators in Germany and France, the region’s two largest economies. However, much of the pressure is coming from outside the region. In its economic bulletin on Thursday, the ECB said risks are to the “downside” and “global headwinds continue to weigh on euro-area growth.”

“We’re in the midst of a quite unpleasant downturn,” Neville Hill, an economist at Credit Suisse in London, told Bloomberg Television. “But what’s interesting is that it’s still predominantly driven by the rest of the world rather than domestic weakness.”

The ECB wouldn’t be alone in anticipating improvement. Economists predict that growth will accelerate to a 0.4 percent quarterly pace from just 0.2 percent at the start of 2019 -- far closer to the average in recent years. That would suggest that first-quarter gross domestic product numbers due on Tuesday may be the point the euro region puts the worst behind it.

Such data and subsequent news in the next six weeks will be pivotal for policy makers approaching a mid-year decision, accompanied by new forecasts, on whether the economy needs more stimulus or can manage on its own.

So, what can officials wish for to call a halt to the downturn and see the situation stabilizing?


Draghi has long warned that protectionism is taking a toll, and one crucial element for the outlook is an easing of trade tensions. A U.S. deal with China and no escalation in its tit-for-tat battle with the European Union would be a big help.

ECB Needs a Year of Two Halves Amid Elusive Pickup in Growth

While the threatened U.S. tariffs might only have a modest direct effect on the economy, the spillover to confidence and investment could be more substantial. Sentiment across the region is already under pressure, thanks to a pile-up of trade, Brexit, Italy’s fiscal situation and France’s Yellow Vests.


Along with some signals that the world’s two biggest economies are inching closer to a trade deal, growth in China appears to be stabilizing. First-quarter GDP came in slightly ahead of forecasts, and recent industrial and retail numbers have shown improvement. China’s outlook was upgraded last week by UBS, which also cited property investment and market sentiment after policy easing by the central bank and the government.

Real Money

Low inflation may be a headache for the ECB’s Governing Council, but it means real pay increases for workers. Along with employment growth, that’s helping consumer demand, as regularly noted by Draghi. “Further employment gains and rising wages continue to underpin the resilience of the domestic economy,” he said after this month’s policy meeting.

ECB Needs a Year of Two Halves Amid Elusive Pickup in Growth


It’s a sideshow for the euro area, relative to the daily battles taking place in the U.K., but there’s no getting away from Brexit, and a messy divorce wouldn’t be welcome. It’s “part and parcel of the overall uncertainty that is hanging over our continent,” Draghi says. According to Bloomberg Economics, 2.7 percent of euro-area GDP is exposed to trade with Britain. That’s not a massive amount, it says, but given the weak outlook for 2019, “it could prove significant.”

ECB Needs a Year of Two Halves Amid Elusive Pickup in Growth

The Big Three

Germany, France and Italy. They account for almost two thirds of the euro-zone economy alone and all have their issues. In Germany, the car industry is in upheaval because weaker demand in China, the threat of U.S. tariffs and a shift to electric. France is dealing with weekly protests and riots, and Italy’s poor economic prospects mean it can’t get control of its debt problem. All are worries for a region that never properly shook off the effects of two crises in the past decade that left it with a weakened banking system and fractured politics.

Silver Lining

The outlook looks shaky, but there are positives to cling to, such as better industrial production figures in Germany, Italy and France, and an improvement in the April composite PMI out of Germany and France. There’s even reason not to be too down about this week’s Ifo, according to UniCredit. The expectations index slipped in April, but it remains well above the February low.

“The turnaround pattern is still intact,” said Andreas Rees, chief German economist at UniCredit. “One major trigger could kick in on the export side. In case of a trade agreement between the U.S. and China, uncertainty for exporters worldwide should diminish which would especially be good news for German companies.”

©2019 Bloomberg L.P.