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September 27, 2019

The Eurozone's Low Growth And Lower Rates Will Reach Into 2020

<strong>By: S&P Global Ratings</strong>

Considering there's no rebound in sight in external demand, economic weakness in the eurozone is now set to extend into 2020, S&P Global Ratings said in a report published yesterday, "<a href="https://app.ratings.spglobal.com/x0T0030b2Og0gFM04r04JS4" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?q=https://app.ratings.spglobal.com/x0T0030b2Og0gFM04r04JS4&amp;source=gmail&amp;ust=1569646947962000&amp;usg=AFQjCNFUAuqBhK9OHxMBDZZ8O76ab0StRQ"><b>Low Growth And Lower Rates: The Eurozone In 2020</b></a>."<u></u><u></u>

Global trade growth is hovering around zero, trade tensions persist, and Chinese GDP growth is likely to slow to below an annual 6%. The main pillar of eurozone growth remains consumption, thanks to tight labor markets and dynamic wage growth. <u></u><u></u>

"The eurozone domestic economy is slowly starting to feel the effects of the trade-related manufacturing slowdown," said S&P Global Ratings Senior Economist Marion Amiot.<u></u><u></u>

The divergence in the services and industry sector has worked as an asymmetric shock on the eurozone economy. Germany remains the most affected by the collapse of world trade due to its overreliance on exports for growth. Italy is second in line, but a reduction in political uncertainty and sovereign risk premiums should lend some support to business confidence and boost domestic demand in 2020.<u></u><u></u>

France and Spain stand out as resilient so far because the trade slowdown affects them mostly through the slowdown in growth of their large eurozone trade partners. Unlike Italy and Germany, they have also kept growth in unit labor costs in check over the past few years. In addition, French consumers are benefiting from supportive fiscal measures.<u></u><u></u>

Amid the economic weakness, the European Central Bank has once more pulled all of its easing levers to support growth and inflation. It has pushed rates further below zero and ensured that government yields will continue to trade in negative territory for a while with the resumption of net asset purchases from November (see "<a href="https://app.ratings.spglobal.com/O0b0404S0203FTgP050rgJM" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?q=https://app.ratings.spglobal.com/O0b0404S0203FTgP050rgJM&amp;source=gmail&amp;ust=1569646947962000&amp;usg=AFQjCNHk0PD3qEcyixTRN-SBI9Zolsnl1w"><b>New ECB Stimulus Package Is Likely To Keep Interest Rates Low Through 2023</b></a>," published on Sept. 13, 2019). Looking at our inflation forecasts and the ECB's forward guidance, we don't expect any rate hikes before 2022.<u></u><u></u>

Monetary policy aside, high leverage and secular trends such as low potential growth and aging are also weighing on long-term rates in Europe. Reflation through fiscal policy would help break this circle and ensure that the ECB doesn't have to do even more quantitative easing and thus push rates further into negative territory to lift growth and inflation.<u></u><u></u>

This report does not constitute a rating action.

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