The European Commission cut its euro-area growth and inflation forecast for next year as trade tensions and policy uncertainty weigh on the region, strengthening Mario Draghi’s case for further stimulus measures.
The latest warning comes just two weeks before the European Central Bank (ECB’s next policy meeting, where it may lower interest rates or signal that action is imminent. The fallout from slower global demand was already laid bare when German chemicals giant BASF SE shocked investors with a huge downgrade to its profit outlook.
In its quarterly forecasts, the EU’s executive arm trimmed its 2020 euro-area GDP projection to 1.4 percent from 1.5 percent amid what it said were increased downside risks. On inflation, both this year and next were lowered modestly to 1.3 percent. The ECB aims for inflation of just below 2 percent over the medium term.
The report reflects more pronounced weakness in the region, which has stumbled along with the global economy as trade disputes hit manufacturers and dent broader confidence. As hopes for a stronger second-half performance fade, the commission said an extended economic confrontation between the US and China and Brexit are threatening the fragile economy.
“The resilience of our economies is being tested,” said European Commission Vice President Valdis Dombrovskis.
The EU’s forecasts come in the wake of economic numbers — particularly in Germany — that have added to pessimism about the euro area. All of that is giving ECB President Draghi reasons to follow through his pledge to loosen monetary policy again if the situation doesn’t improve.
A survey of investors suggested a German recession is likely, and confidence among French manufacturing executives is at its weakest in six years. Concern about the economy, along with an expectation of ECB stimulus, is pushing bond yields lower across the region. Germany’s 10-year yield is stuck below zero, while even borrowing costs in Italy have fallen despite concerns about the nation’s fiscal situation.
Germany and Italy are projected to have the lowest growth rates in the euro area this year, dragging down the outlook for the rest of the bloc. The currency bloc’s biggest economy will expand by 0.5 percent, while Italy is flirting with stagnation at 0.1 percent. Those numbers are unchanged from May projections, as is the 1.2 percent forecast for the euro area.
“The rebound anticipated later in the year now looks weaker, as the global manufacturing cycle has yet to bottom out and the outlook for trade and investment continues to be clouded by protectionism and uncertainty,” the commission said.
German firm ‘insolvencies’ to rise for first time in 10 years
The number of German corporations going insolvent is expected to rise for the first time since the 2009 economic crisis.
In the latest sign that Europe’s biggest economy could be on the verge of recession, German credit rating agency Creditreform says the trend for company closures is hitting a turning point. The rate of corporate insolvencies sank by just 0.4 percent in the first half of the year — 9,900 corporations have already become insolvent — and a total of 20,000 are expected by the end of 2019.
German factories are already in a slump after temporary problems last year morphed into a sustained downturn amid global trade tensions. The European Commission revised next year’s GDP forecast for the nation lower on Wednesday, saying the manufacturing weakness risks spilling into the service sector, the biggest part of the economy.