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News | Question of the Week, WC 12th November
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Question of the Week, WC 12th November

Q: Will the economic slowdown in the Eurozone continue?  

A. Headline economic data in the euro area have deteriorated steadily in recent quarters, culminating with a string of awful GDP headlines. Growth in the Eurozone slowed to 0.2% quarter-on-quarter in Q3, from 0.4% in Q2, pegged back by a plunge in German GDP and a stalling Italian economy. The dreadful German headline partly was due to a one-off hit to growth from falling exports and production the auto sector ahead of the new EU emissions rules. But investors understandably are asking whether the slowdown in the euro area is the beginning of a more sustained downtrend. 

The answer to this question depends on which data you look at. On a year-over-year basis, GDP growth in the Eurozone has been slowing steadily this year, fully consistent with the weakening trend in the PMIs, as our next chart shows. We think the year-over-year rate will dip further to 1.5% in Q4, down from 1.7% in Q3. 

 

That said, story for the quarter-on-quarter rate—which markets tend to focus on—is more upbeat. The swoon in Q2 almost surely pulled growth below trend, which is clear if we look at the implications for the Q4 numbers. Even with a fall in the year-over-year rate, the run-rate would jump to 0.4-to-0.5%. Looking ahead, our baseline assumes that year-over-year growth will stabilise at about 1.5% in the next few quarters, implying quarter-on-quarter growth of 0.3-to-0.4% through next year. This forecast fits with the story from real M1, as our final chart shows. If we are right, full-year growth in 2019 will come in at 1.5%, which is slower than the ECB and markets currently expect—1.8% and 1.7%, respectively—but still decent when considering the weakening drivers of long-term growth in the Eurozone, principally an ageing population and lacklustre productivity. 

Claus Vistesen, Chief Eurozone Economist

Pantheon Macroeconomics

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Posted: 14th Nov 2018

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