Eurozone Outlook 2020: Sluggish growth a challenge for the ECB

Growth in the eurozone has dropped to levels well below the trend rate, and the weakness is expected to continue in the first half of 2020. The economy should regain some strength in the course of 2020, but the recovery will be moderate, with growth ending the year at around trend. A recovery in global growth and world trade should result in accelerating exports and industrial production in second half of the year … whereas fixed investment growth and private consumption growth will weaken due to depressed profitability and deteriorating labour market conditions. Increasing labour market slack and low inflation expectations will limit wage growth, and core inflation is expected to edge lower in the course of 2020. Only modest fiscal stimulus is expected, as European rules and domestic policy choices prevent a fiscal boost that could potentially lift growth to above trend levels. The ECB is expected to ease policy further in coming months by cutting its deposit rate one more time and by stepping up the pace of asset purchases; we do not expect any moves to make policy less accommodative on our forecast horizon. Bond yields are likely to be depressed in the coming months by the expected dovish policy shifts.