Eurozone Outlook 2019 – Slow growth puts ECB on ice

We expect the eurozone economy to grow only modestly and below consensus forecasts in 2019 …exports will remain weak as the global economy has lost momentum on the back of tightening financial conditions, while the US economy will cool off when the impact of the fiscal stimulus fades away in the course of 2019. Fixed investment growth will weaken in sync with exports, but private consumption growth should pick up thanks to declining inflation, modest fiscal stimulus and low interest rates. There is still significant slack in the labour market and wage growth and core inflation will remain subdued for a considerable time. Political risks remain elevated, with the political landscape fragmented in most eurozone countries, which has resulted in minority governments, caretaker governments and fragile coalition governments, and which hinders policy making and economic reform. The ECB has ended its asset purchases, but is expected to keep interest rates unchanged throughout 2019. We expect a first ECB hike in March 2020 but the risks are skewed towards even later. Bond yields are likely to be depressed in the coming months by dovish policy shifts, but could rise modestly towards year-end as markets anticipate ECB rate rises.