S&P cuts euro zone growth forecast, citing weaker global trade

Standard and Poor’s (S&P) has cut its growth forecast for the euro zone to 1.1 per cent, suggesting a slowdown in economic activity globally has resulted in weaker global trade.

Amid the weaker-than-expected outlook, the agency also said it did not expect the European Central Bank (ECB) to begin raising interest rates until at least January 2020.

“The euro zone economy is shaking off weakness from a drop in external demand and domestic one-off effects in late 2018,” it said.

However, it predicted growth across the currency bloc would move back on trend and rebound to 1.4 per cent in 2020 and 2021.

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“At the end of 2018, the European economy lost some air in its tyres, worrying investors about a potential recession that helped trigger a bout of volatility,” it said. “If investors and financial markets have calmed their nerves, we think it’s partly because the economic weakness was temporary and is now behind us,” it added.

The agency said a key element of last year’s slowdown was moderation in activity globally and thus much weaker global trade. “This particularly hit the manufacturing sector in the second half of 2018, translating into a weak to negative performance of the German and Italian economies, two major European industry hubs,” it said.

Despite the setback, it said the outlook for external demand has improved. "We expect growth to stabilise in China, the euro zone's second-largest trading partner, on the back of the government's fiscal and monetary policy stimulus, while the economic situation in emerging markets such as Turkey will be less negative for export growth," it said.

Muted

“That said, external demand is still likely to remain muted, and thus we expect the German and Italian economies, Europe’s large industrial hubs, to significantly underperform the euro zone this year,” it said.

On a more positive note, the agency said temporary factors that sapped growth last year are wearing off.

"Protests in France are now less disruptive to economic activity, and incoming

data show a sharp rebound in car registrations and orders after a halt in car production in Germany linked to new emission tests last year," it said. The agency also sounded a more upbeat note on the labour market, dismissing speculation it had run out of steam.

“Vacancies climbed further in the fourth quarter and the unemployment rate dropped to 7.9 per cent -its lowest level since 2008 and with a participation rate at an all-time high,” it said, noting this was bolstering wage growth.

Amid more dovish comments from Frankfurt, it said monetary policy is set to remain accommodative for longer. S&P Global Ratings’s economists now expect the ECB’s first rate hike to come in January 2020.

“A more dovish ECB also means that the euro exchange rate will stay weak for another year, acting as a sort of buffer in a phase of weaker global trade,” it said.