European economic outlook: Gradual re-acceleration in 2020 – country divergence to persist

The slowdown of t he euro area economy since the beginning of the year can be mostly explained by a more challenging external environment. Brexit and trade war related uncertainty will continue to weigh on euro area growth for the time being. That said, ou r baseline scenario foresees a resolution of the Brexit related uncertainty in the near term and we also don’t expect any further escalation in US/China trade tensions. The improvement on the external side will gradually translate into to a pick-up in export growth . Coupled with relatively robust domestic demand , this will lead to a moderate re-acceleration in growth during the course of next year (see page 3- 5 ) . The German economy w as hit hardest among the EMU4 countries by the deterioration in the global industrial cycle and will consequently benefit the most from the envisaged external improvement. But the recovery will still be muted in our view as several structural headwinds, such as de-globalisation risks and the need for de-carbonization, will continue to buffer the German economy (see page 6 - 8 ) . The French economy has been less affected by the global slowdown o wing to strong domestic demand. The resilience in consumption and investment spending is also a consequence of fiscal measures and structural reforms undertaken by the government . The positive effect of the latter will continue to support growth next year (see page 9 - 1 1 ). Italy has avoided a recession so far and a sharp easing in financial conditions and an expansionary fiscal policy will lead to a moderate acceleration in growth next year. We expect the partners in the ruling coalition in Rome to st ick together, though we don’t think that the government will tackle any of the underl ying s tructural problems th at continue to weigh on the Italian economy (see page 12-13) . Spain will remain on our forecast the fastest growing economy among the EMU4. With a relative small manufacturing sector, Spain has been less affected by the weaker external environment . At the same time, domestic demand will continue to grow robustly , not least as job growth is showing no sign of weakness . The main risks seem to lie on the political side, as it has become increasingly difficult to form a government in a splintered political landscape (see page 14-15) .