EUROPE: Trends show Euro-area growth to remain weak, Brexit uncertainty

Euro-area growth is expected to remain weak in the rest of 2019, with the slowdown driven by weakness in industry and global trade, according to DBRS Ratings.

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Notable factors that have weighed on EA exports include Brexit-related uncertainty and the Chinese economic slowdown, the rating agency said in its latest macro update of view and key trends in the Euro area and the United Kingdom.

Additional risks to the EA export outlook include a no-deal Brexit and the imposition of US tariffs on the EU car sector.

On the production side, EA industrial output has deteriorated further, the DBRS report said.

The contraction in industrial production is driven by the decline in German production, which has been hit by the weakness in the global car market, particularly the Chinese market. Industrial production in Italy and the Netherlands also continues to decline. One factor is their exposure to Germany. Indeed, both Germany and Italy were a drag on EA growth in H1 2019. Countries with more limited exposure to global trade, including France and Spain, or those that have adopted fiscal stimulus, including France and the Netherlands, performed better.

As anticipated, the ECB has eased its monetary policy stance at its latest policy meeting. In DBRS’s view, this easing should help the EA economy, but is unlikely to lead to growth momentum in the near term, given the ongoing external uncertainties. Looking ahead, a potentially larger fiscal expansion in the EA could prove an upside risk to the EA economic outlook.

In the UK, DBRS takes the view that the underlying picture reflects continuing Brexit uncertainty, in conjunction with a weak external environment that will continue to weigh on UK GDP growth for the remainder of 2019. Reflecting uncertainties, the Bank of England’s monetary policy committee stated that the monetary response to Brexit could be in either direction. For now, loose monetary policy combined with a less restrictive fiscal policy going forward may prevent the economy slipping into technical recession, although the risk remains.