Eurozone: Ending the year on mixed signals – Danske Bank

In view of analysts at Danske Bank, with the sealing of a phase one deal between the US and China and progress on the Brexit front, two notable downside risks for the euro area growth outlook have been cleared. 

Key Quotes

“December PMIs marked a disappointing finish to 2019 for the economy, with the manufacturing index falling back to 46.3 from 46.9 in the previous month. While disruptions and strikes on the back of the pension reform dented industrial activity in France, PMIs also showed that Germany is not yet out of the woods. Although the industrial recession has eased - not least due to the improved export outlook - it has yet to turn the corner and manufacturers continue to reassess staff levels. Rays of light still glimmer on the services front, where activity rebounded, but overall we expect only meagre growth of 0.2-0.3% q/q in the coming quarters for the euro area.”

“The December ECB meeting brought little news in terms of policy actions. Still, at her first press conference, President Lagarde confirmed that clouds over the economic outlook have lifted and that the long-awaited monetary strategy review will start in January and is intended to be concluded by end-2020.”

“The dark inflation clouds brightened a bit more in December as core inflation stayed broadly unchanged at 1.3% and headline inflation rose to an eight-month high of 1.34% helped by a rebound in energy prices. For the ECB it is encouraging news that the core inflation pick-up finally shows some resilience in light of high wage growth. This strengthens the case for a less dovish tone at the January meeting. However, with goods price inflation still depressed, we remain doubtful about a material change in the core inflation dynamics in 2020 that could get the ECB back into tightening mode.”

“As the grand coalition in Germany remains on shaky ground under the new SPD leadership and a coalition rift in Italy over yet another bank rescue (Banca Popolare die Bari) and upcoming regional elections in Emilia-Romagna cannot be written off, European politics should be entering into an eventful 2020.”