E The ECB Admits That The Euro Area Economy Faces Stiff Headwinds

The Euro Area’s manufacturing PMI is at its lowest level in over four years, and the services measure is at a 5-year low. The sluggishness in Germany doesn’t seem temporary after all: the manufacturing PMI contracted for the first time in four years, although services held up. Business confidence is at a 2-year low. The VDMA is seeing weaker foreign and domestic demand for machine orders. There is also uncertainty about whether or not the U.S. will introduce higher import taxes on European cars. And, although it appears that Germany just managed to skirt a recession, the fact that the “R” word is even entering the conversation is astonishing”. - (Jennifer Lee, BMMO Capital Markets Focus, Jan. 25, 2019)

Mario Draghi, President of the European Central Bank, has been forced to acknowledge that the risks to the Euro Area’s economy have dramatically worsened. 

In particular, the economic slowdown in China and the threat of protectionism out of the US are curtailing Eura Area growth, which relies heavily on exports.

While low oil prices and a strengthening job market are positives, nonetheless most forecasting groups are lowering their expectations for Euro Area growth this year.

The International Monetary Fund has reduced its prediction for Euro Zone growth in 2019 to 1.6%. This year’s economic growth in Germany and Italy are also projected to slow to 1.6% and 1.3%, respectively. 

While Draghi has argued that the Euro Zone escaped the risk of prolonged Japan-style deflation, nonetheless core inflation was barely above 1% when he announced that the ECB was going to stop adding new bonds.

The Euro Area annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco, stood at 1% in December 2018, the same as in November.

In other words, the ECB’s target of keeping core inflation at slightly below 2% over the medium term.is at risk this year.

As a result of these worries, the European Central Bank recently pledged to keep interest rates at record lows at least through this summer because of the rising concerns over the region’s economic growth outlook.

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