IMF cuts eurozone growth forecasts, as Germany slows
BRUSSELS: Eurozone economic growth is set to slow more than expected as the bloc’s manufacturing crisis could spill over to the larger services sector under protracted global trade tensions, the International Monetary Fund said yesterday.
The IMF said the 19-country euro zone would grow by 1.2 percent this year, revising down its earlier estimates from April of 1.3 percent growth for the bloc. That is a significant slowdown compared to last year’s 1.9 percent expansion. The bloc’s economy would grow by 1.4 percent in 2020 and 2021, the IMF said, cutting its previous estimate of 1.5 percent growth in both years.
The slowdown is mostly due to anaemic growth in Germany, the euro zone’s largest economy, and stagnation in Italy, the third-biggest, the fund said, revising down its earlier forecasts for both countries. Germany is now expected to grow by only 0.5 percent this year, slower than the 0.8 percent the IMF had predicted in April. That would be one-third of 2018 growth.
The IMF also cut its growth forecast for France, the bloc’s second-largest economy, despite better-thanexpected output estimates for the third quarter released last week. The country is now expected to grow by 1.2 percent this year, instead of the 1.3 percent previously forecast. To counter the slowdown, the fund reiterated its call for a “synchronized fiscal response” by euro zone governments, in a clear message to Berlin to invest more. It said the slowdown, so far mostly caused by the impact of global trade tensions on the bloc’s export-driven industry, could spill over to services, the largest economic sector in the eurozone.
Britain’s process to leave the European Union was also a cause of concern, with a no-deal Brexit causing vast negative effects on both Britain and the EU. In the event of an orderly Brexit, which could occur by the end of January, the IMF confirmed its earlier estimates that Britain’s economy would grow by 1.2 percent this year and 1.4 percent next. Growth was 1.4 percent in 2018. Inflation in the bloc is expected by the IMF to be 1.2 percent this year, 1.4 percent next and 1.5 percent in 2021, short of the European Central Bank’s target of a rate close but below 2 percent.
Meanwhile, eurozone business activity grew more than initially thought last month but remained close to stagnation, according to a survey whose forward-looking indicators suggest the existing growth might dissipate.
Wednesday’s survey of businesses comes soon after the European Central Bank resumed its 2.6 trillion-euro bondbuying program to try and stimulate inflation and growth. The former head of the ECB, Mario Draghi, repeatedly called on eurozone countries to add fiscal support to stoke growth, saying because monetary policy could only do so much, and yesterday’s readings suggest additional support may be needed. His successor, Christine Lagarde, took over at the ECB last week. She will need to smooth over the differences between cash-rich countries such as Germany and the Netherlands, who opposed the decision to resume bond purchases, and the euro zone’s struggling periphery.
IHS Markit’s final eurozone composite Purchasing Managers’ Index (PMI), considered a good gauge of economic health, rose to 50.6 from September’s 50.1, its lowest in more than six years. That exceeded a preliminary estimate of 50.2 but remained near the 50 mark separating growth from contraction. “Despite the upward revision, the index is consistent with the economy barely growing at the start of Q4. We expect growth to slow across the board,” said Melanie Debono at Capital Economics.