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Europe's Economy Scarred by Italian Recession as Risks Pile Up

Euro Area Maintains Momentum on Stronger French, Spanish Growth

(Bloomberg) -- The euro-area economy looks sluggish amid a recession in Italy and increasing risks from within and outside the region.

While the economy maintained its pace of expansion at 0.2 percent in the fourth quarter, that’s a marked slowdown from earlier in 2018. Compared with a year earlier, growth was the weakest since 2013.

Exports helped the Spanish and French economies expand faster than anticipated. At the same time, a marked worsening in industry contributed to a deeper-than-forecast slump in Italy, while Germany -- the all-important engine of the region -- barely grew.

Europe's Economy Scarred by Italian Recession as Risks Pile Up

Early figures for 2019 haven’t been encouraging. Economic confidence extended its worst losing streak in a decade and a gauge for manufacturing and services dropped to the weakest since 2013. European Central Bank President Mario Draghi has said risks to the outlook have moved to the downside, a signal that policy makers will cut their forecasts in March.

What Our Economists Say...
Growth at a sustained pace of 0.2 percent “would be too slow to keep the labor market tightening and inflation rising, which would be a big problem for the ECB. Yet there are reasons to think growth will accelerate -- much of the weakness reflects idiosyncratic shocks and there is nascent evidence that confidence is stabilizing.”

--Jamie Murray, David Powell and Maeva Cousin. Read our REACT here.

Drags on economic growth that initially appeared to be only temporary have proven to be somewhat more intractable, and weaker demand in China is acting as a drag elsewhere. Germany’s government slashed its 2019 forecast by almost half on Wednesday to a mere 1 percent.

Despite that, Germany still expects unemployment to decline this year, which will help domestic demand. For the euro area as a whole, the jobless rate was at 7.9 percent in December, down from 8.6 percent a year earlier.

In France, retailers including Fnac Darty, Casino and Carrefour saw business disrupted by Yellow-Vest protests that also reined in company investment. In contrast, domestic demand was strong in Spain. Steady, albeit slowing, job creation fueled household spending and government consumption was underpinned by a hiring push by the Socialist administration.


4QSurvey 3Q
Germany“slight” increasen/a-0.2%
France0.3%0.2%0.3%
Italy-0.2%-0.1%-0.1%
Spain0.7%0.6%0.6%

Those figures contrast with reports from Italy. The country’s first recession since 2013 is likely to add pressure on the populist government’s spending plans.

The International Monetary Fund cut its 2019 projection for growth in the euro area to 1.6 percent last week -- a revision of 0.3 percentage point from an October estimate.

--With assistance from Catarina Saraiva, Harumi Ichikura and Kristian Siedenburg.

To contact the reporter on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net

To contact the editor responsible for this story: Fergal O'Brien at fobrien@bloomberg.net

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