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News | Question of the Week, WC 17th December
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Question of the Week, WC 17th December

Q. How much will Eurozone growth slow next year?

A. GDP growth in the euro area has been slipping and sliding this year, from a peak of nearly 3% at the end of 2017, to about 1.5% year-over-year in Q3. A strong start to the year will ensure full-year growth of close to 2% for 2018 as a whole, but this headline is misleading. The numbers for the second half have been grim, so far, which has important consequences for full-year growth, and forecasts, for next year. The key issue is the statistical carry-over which is the effect on growth in the coming year, from assuming that the level of GDP in Q4, in the current year, remains unchanged. The incredibly strong finish to 2017 will end up providing a big boost to full-year growth in 2018, but it is the complete opposite for growth in 2019. What is likely to be a very slow finish to 2018 will weigh on growth in 2019 as a whole. 

This is economic numerology, but it has important implications for official forecasts, and markets’ expectations for 2019. They're almost surely too high, and need to come down in Q1. Our estimates suggest that growth could slip to as low as 1.3% in 2019, even with a decent quarter-on-quarter run rate of about 0.3-to-0.4%. Lower than this, and growth will be looking at a measly 1.0%. This sounds bad, but remember that growth already slowed to 0.2% quarter-on-quarter in Q3, which is probably slightly below trend. Markets ultimately trade on the run-rate, and from that perspective, we actually see upside risks in coming quarters, though the trend in leading indicators suggest that growth will slow further in the second half of next year. 

Claus Vistesen, Chief Asia Economist

Pantheon Macroeconomics

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Posted: 20th Dec 2018

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