Eurozone stagnant as French and Italian economies shrink

THE eurozone faces the prospect of a shrinking economy at the start of 2020 after figures for the end of 2019 showed French and Italian GDP contracting.

Overall the currency bloc grew just 0.1pc in the last three months of 2019, effectively stagnating. This was half the forecast growth rate and the worst quarterly performance since the start of 2013, when the region was still in recession after the eurozone sovereign debt and banking crisis.

It was also a sharp slowdown from the 0.3pc recorded in the previous three months, said Eurostat. Compared with a year earlier, GDP rose 1pc – also the weakest since 2013.

The pound picked up again yesterday, rising 0.2pc against the euro to €1.19 as the data came out and the clock ticked down on the UK’S EU membership.

“The main question now is whether the looming threat of a sudden stop in first-quarter global activity – due to disruptions over the coronavirus – will drag eurozone GDP growth down even further, ostensibly pointing to an outright contraction,” said Claus Vistesen at Pantheon Macroeconomics.

“It’s possible, but it is not our baseline, and we need to see some hard data to make a clearer call.” French GDP fell 0.1pc in the quarter, its first contraction under President Macron, and the first since 2016, a year before he took office.

The eurozone’s second-largest economy has been wracked by strikes over pension reforms in recent months.

“The downturn was broad-based,” said Jack Allen-reynolds at Capital Economics. “Growth in household consumption and investment both slowed, while exports and imports both declined. There was also a big drag from inventories. All of this lends support to our view that the eurozone will grow more slowly than most expect this year.”

With global economic threats including a potential EU-US trade war, there is a rising risk the slump in France and Italy could spread to drag the eurozone overall into negative territory in the first three months of 2020.

Italy’s economy contracted by 0.3pc, an unexpectedly sharp crash. It threatens another recession, after the shallow declines in the second and third quarters of 2018. Its industrial sector contracted, services stagnated and weak domestic demand held the economy back. Economists hope a stabilisation of international trade will help the troubled economy escape recession by the most slender of margins.

“Concern remains with regard to the prolonged weakness of the industrial sector (three quarters in recession) and its negative impact – mainly via a deterioration in labour market indicators – on domestic demand and, thus, services and retail activity,” said Loredana Maria Federico, chief Italian economist at Unicredit. “The degree to which this negative spillover will play a role is still uncertain.” She predicts growth of 0.1pc in 2020’s first quarter.

The International Monetary Fund predicts the eurozone economy will grow by 1.3pc in 2020, with Germany at 1.1pc, France 1.3pc and Italy at 0.5pc. Among the big economies only Spain’s 1.6pc is set to beat a 1.4pc UK forecast.

“The eurozone is not yet out of the woods. GDP contractions in France and Italy stress how, with potential growth so weak across the eurozone, it does not take much for any country to fall into recession,” said Fabio Balboni at HSBC.