Eurozone: Looking For The Trough

Since the summer, households have started to become more concerned about the labor market. No wonder that the savings ratio has been creeping up and without any confidence-boosting event this trend is likely to continue, putting a brake on consumption growth. On the other hand, construction activity still seems to be holding up well, boosted by the very low level of interest rates. Both order books and employment perspectives actually went up in October in the construction sector.

Only gradual fiscal stimulus

The new ECB-president Christine Lagarde called upon countries, that have room for maneuver, to use their budget surpluses to fund public investments. While the Netherlands has already put in stimulus in the 2020 budget, the German government is unlikely to contemplate more stimulus, as long as there is no significant deterioration in the labor market. To be sure, the first signs that employment growth is over the top are popping up, but we might already be well advanced into 2020 before the German government decides on more stimulus.

Recession avoided

We still believe that the current downturn will not degenerate into an outright recession. The combination of easy monetary policy and some fiscal stimulus, together with a trade truce and a clean Brexit, will support a cyclical improvement in the course of 2020. Not enough to lift growth above 1% though (we expect 0.7%) and given the importance of an improvement in terms political uncertainty, the risks to the outlook are still downward.

Employment perspectives

Source: Refinitiv Datastream

Yield curve steepening

Eurozone inflation fell to 0.7% in October, however, this decline was mostly due to lower energy prices. Underlying inflation actually slightly increased to 1.1%, though this is still significantly below the ECB’s target. Given the growing dissent in the ECB’s Governing Council we hardly see a possibility for more stimulus and the overall feeling is that the marginal positive effect of more monetary easing would be annihilated by the growing negative side-effects. It also looks that a big review of the ECB’s strategy is underway, which is likely to dominate discussions within the Governing Council for some time to come, with monetary policy to remain on hold in the meantime.

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