OECD downgrades growth projections for the Eurozone

EPA-EFE//JAVIER LIZON

Organisation for Economic Co-operation and Development (OECD) Secretary General, Angel Gurria attend the presentation of the OECD's Economic survey.

OECD downgrades growth projections for the Eurozone


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The Paris-based Organization for Economic Co-operation and Development (OECD) slashed its growth forecasts for the Eurozone after projecting that the 19-member currency union’s GDP will grow by only 1% in 2019 and continue at a sluggish 1.2% pace in 2020.

Since November 2018, the OECD originally projected the Eurozone’s growth to reach 1.8% for 2019 and dropping to 1.6% for 2020. That forecast, however, came into question after Germany’s growth is expected to drop to a meek 0.7% in 2019 and Italy is in the throes of a recession.

For Germany, this is a particularly adverse downgrade given the OECD’s previous 1.6% growth projection in November of last year. One of the major challenges is the sharp deceleration of export growth, which plummeted to zero in 2018. That drop is having a particularly negative effect on the German economy, where 20% of jobs depend on exports.

The European Central Bank’s (ECB) council is expected to follow the OECD in cutting growth forecasts for 2019. It is unclear how the ECB will react to the rapid deceleration of the EU’s economy, which grew by barely 0.2% in the last quarter of 2018. There is hope that a pause in monetary tightening could ease the pressure on the economy.

The European Central Bank is unlikely, however, to announce any additional measures as the hope is that the strength of the labour market will translate to increased domestic spending.

At the same time, the ECB also hopes that a fall in energy prices could act as an indirect stimulus measure. The bank already (re)invests €15 billion a month in bond markets from maturing bonds from its €2.6 trillion quantitative easing programme.

China is moving more resolutely towards a fiscally expansive policy by slashing taxes and allowing for shadow banking to resume, This is then coupled with Beijing’s announced further investment into infrastructure, which has led the OECD to expect that the new Chinese stimulus will allow the government to meet growth targets of 6-to-6.5% in 2019.

Whether this rate will be achieved is significant for the global economy following a 2% drop in Chinese growth, which translates into 0.4% decline in global growth. The OECD expects global growth to slow from 3.6% in 2018 to 3.3% in 2019.

Further complicating matter is the lack of progress in the trade talks between China and the United States, as well as the increasing likelihood of a ‘no-deal’ Brexit. According to the OECD, the UK’s economy will only see 0.8% growth in 2019, significantly down from the November 2018 growth projection of 1.4%.

The picture could further deteriorate under a disorderly Brexit scenario as the OECD expects that the UK’s plan to revert to World Trade Organization terms of trade with the EU would reduce output by 2% over the next two years. This would also hit the Danish, Dutch, and Irish economies particularly hard due to the fact that their overall exports to the UK could fall by at least 15% in the medium term.

 

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