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Is Europe headed for recession?

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02/01/2019 | 10:02am EDT

New data released on January 31 shows a grim picture for the eurozone growth. It has slowed to its lowest pace in over four years. Eurozone GDP only rose by 0.2% in July-September, down from 0.4% in April-June.

Italy’s growth rate fell to zero, but France did better: its economy grew by 0.4%, thanks to a recovery in consumer spending and business investment.

The EU’s Industrial output declined 1.7% month over month in November after rising just 0.1% in the prior month. Meanwhile, the consumer sector also showed signs of weakness, as German retail sales fell 4.3% month over month in December, the sharpest drop since 2007.

In a new report Wells Fargo considers whether the Eurozone economy will continue to slow, and the potential impact on ECB policy.

The financial company believes that the lackluster figures raise concerns that the slowdown in Eurozone growth could last longer than previously expected.

Therefore, it is downgrading its GDP forecasts for the Eurozone to 1.5% for 2019 and 1.4% for 2020 (from 1.6% and 1.5%, respectively), and pushing back the timing of ECB rate hikes.

The ECB already signaled in June 2018 that rates would be on hold at least summer 2019. “However, as Eurozone economic data have continued to disappoint, markets have become increasingly skeptical that the ECB will be able to raise rates in 2019, or at any point in the current cycle. “

Wells Fargo said it is not, at this moment, convinced that the euro area economy is headed for recession. Based on its findings, it would need to see GDP growth of around 0.1%-0.2% for at least another quarter before it would be ready to call for a recession in the Eurozone.

“We think the euro area economy will dodge a near-term recession, but acknowledge that growth will likely continue to slow on trend.”

However, while its forecast still calls for one 20-bp deposit rate hike in Q4-2019 (December), it is pushing back its call for the next hike to June 2020.

Romain Fournier
© MarketScreener.com 2019
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