Europe's Economic Outlook Goes From Bad to Worse Amid EU Warning

(Bloomberg) -- The economic outlook in the euro area is going from bad to worse.

The 19-nation region has had a poor start to 2019: disappointingly weak indicators keep rolling in, the list of one-off growth inhibitors is getting longer, and a slew of institutions are downgrading their forecasts. Now, the bloc’s executive sees “substantial” risks -- a change in tone that goes beyond the downbeat assessment of the European Central Bank.

The European Commission says an Italian economy close to stagnation and significantly weaker momentum in Germany will weigh on growth in the euro area this year, and has issued sweeping downward revisions to most of the region’s major economies.

Europe's Economic Outlook Goes From Bad to Worse Amid EU Warning

Gloomier prospects reflect the protracted impact from unrest in Italy and France, and changing regulations that held back car production -- particularly in Germany. Also looming are uncertainty around global trade and a sharper-than-expected slowdown in China.

While ECB President Mario Draghi and colleagues have acknowledged the weakness and lowered their expectations for the outlook, they also point to rising wages and job creation as reasons for optimism. Last month, they classified growth risks as having “moved to the downside,” yet stopped short of changing their guidance on ultra-low interest rates, let alone resuming bond buying.

Spillovers

Data since that meeting have signaled continued deterioration. What was mostly a manufacturing and export-led slowdown is starting to spill into services, purchasing managers’ indexes showed this week, and an anticipated rebound in industry was pushed further out by unexpected declines in German and Spanish output.

Company earnings reports appear to underscore the struggles. Infineon Technologies said Tuesday it plans to reduce investments, arguing that high levels of uncertainty have sidelined customers. GEA Group issued a profit warning on Thursday citing further worsening macroeconomic conditions.

In its forecasts, the Commission predicts the 19-nation euro-area economy will expand 1.3 percent this year, down from 1.9 percent projected in November. For 2020, it sees growth at 1.6 percent.

What Our Economists Say...
“In the past, the euro area has kept its footing when Germany has stumbled. We think it would take a more widespread shock for the euro area to suffer a big downturn. ”

--Maeva Cousin and Jamie Murray, Bloomberg Economics. Read more here

Clouds on the horizon are getting darker, it said, pointing to the global environment, the potentially disruptive impact from Brexit and abrupt fiscal tightening in the U.S., among other things.

“Even if easing somewhat, trade tensions and the uncertainty surrounding their evolution still pose high risks for the global economy,” the Commission report said. “The Chinese economy might be slowing more sharply than anticipated while many emerging markets are still vulnerable to sudden changes in global risk sentiment.”

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