Industry slows Down Eurozone Economy

Industry slows down eurozone economy

At 0.8%, macroeconomic output in the eurozone grew somewhat slower in the second quarter 2019 than at the beginning of the year. The export-heavy German economy was particularly affected by restrained global demand and China’s economic slowdown. The economy is also flagging in Italy. Although the export-oriented and industry-heavy Italian economy is performing relatively well considering the current global economic environment, it has not yet fully recovered from the recession in the second half of 2018.

In contrast to Germany and Italy, France recorded a robust macroeconomic expansion supported by strong domestic demand. Fiscal stimuli launched to thwart national protests against the planned tax raises are likely to have played a role in this trend. Among the remaining eurozone countries, the Baltic states, Portugal and the Netherlands recorded particularly robust dynamics. The Spanish economy is also buoyed up by private consumption, which is driven by high real wage growth, a declining savings rate and a downward trend in unemployment.

In contrast to Germany and Italy, France recorded a robust macroeconomic expansion supported by strong domestic demand. Fiscal stimuli launched to thwart national protests against the planned tax raises are likely to have played a role in this trend. Among the remaining eurozone countries, the Baltic states, Portugal and the Netherlands recorded particularly robust dynamics. The Spanish economy is also buoyed up by private consumption, which is driven by high real wage growth, a declining savings rate and a downward trend in unemployment (see G 3).

Eurozone labour market improves, inflation remains low

Irrespective of the economic slowdown, the situation on the European labour market continues to improve. This is primarily due to the labour market’s cyclical time lag. However, it is also an indication that the reform measures taken during the crisis years are bearing fruit. At 7.5%, the overall eurozone unemployment rate this summer was half a percentage point lower than a year ago. Although Germany still has the lowest rate (3%), the former crisis countries Italy (9.9%), Spain (13.9%) and Greece (17.2%) are recording further progress (see G 4).

At 1%, inflation in August was around a percentage point lower than a year ago, which was also due, among other factors, to the decline in energy prices. For the current year, KOF expects a rate of 1.2%, followed by 1.3% and 1.5% in 2020 and 2021. This places the eurozone inflation rate significantly below the ECB inflation target of close to, but under, 2%. Consequently, the departing ECB President Mario Draghi made monetary policy slightly more expansive in September, lowered the deposit rate of interest by 10 basis points to -0.5% and announced renewed bond purchases.

Outlook dominated by downward risks

Uncertainty at the economic policy level remains very high and is likely to remain so in the coming months. It is still unclear when, whether or under what circumstances the UK will leave the EU. On top of this, there is a risk that the US-China trade war may escalate further. If the two countries fail to come to an agreement in the coming months, all US imports of Chinese goods could be subject to tariffs of up to 30% by the end of the year. The trade conflict between the USA and the EU is a further factor that ratchets up the level of uncertainty. In November, the USA is expected to pass a decision on potential US protective tariffs on European car exports.
All these uncertainties at the economic policy level are slowing down the global economy. Measured by global output and weighted by Swiss export shares, by late 2020, Switzerland’s international environment is likely to grow at half the pace of the 2017 boom. Due to a drop in capacity utilisation rates worldwide, inflation dynamics are also likely to slow down in the forecast period. In this context, the situation in the Near and Middle East represents a further risk factor. Should the tensions on the Persian Gulf escalate, there is a risk of rapidly rising energy prices and additional geopolitical uncertainty, which would further affect the global economy.