06 June 2019

ECB: Eurosystem staff macroeconomic projections for the euro area

Although real GDP growth was stronger than expected in the first quarter of 2019, recent indicators point to weaker growth in the second quarter and a moderate increase during the remainder of 2019. Economic sentiment indicators have continued to worsen across euro area countries over recent months, notably in sectors exposed to global trade.

This reflects the ongoing weakness in global trade in an environment of continued global uncertainties (such as threats of an escalation of protectionism and the possibility of a disorderly Brexit). These factors weigh on export order books and on production expectations in the manufacturing sector, and are likely to continue to hold back euro area activity in the near term.

At the same time, sentiment in the domestically-oriented services and construction sectors has been more resilient in recent months and the labour market situation has continued to improve.

Overall, the fundamental domestic factors that should support the euro area expansion, namely the very accommodative stance of monetary policy, rising wages and some fiscal easing, remain broadly in place.

In addition, foreign demand is expected to gradually recover during the course of 2019 and to provide a stronger impetus over the remainder of the projection horizon. Altogether, real GDP growth is projected to decline from 1.8% in 2018 to 1.2% in 2019 before increasing to 1.4% in 2020 and 2021. Compared with the March 2019 projections, real GDP growth in 2019 has been revised up slightly, as the upward impact of a stronger than expected first quarter more than offsets downward revisions to growth in the following quarters, mainly due to more persistent weakness in global trade. This implies a weaker carry-over into 2020. In addition, the medium-term projections have been revised down marginally. 

HICP inflation is expected to moderate this year but to recover thereafter, reaching 1.6% in 2021. Energy inflation will continue to decline in the short term, on the back of downward base effects and slightly declining oil price assumptions, and stabilise thereafter. HICP inflation excluding energy and food will pick up gradually, supported by the envisaged economic expansion. At the same time, past increases in labour costs will feed into prices and profit margins will recover.

Compared with the March 2019 projections, HICP inflation has been revised marginally upwards in 2019 due to higher oil prices and marginally downwards in 2020 due to a more steeply downward sloping path of the oil price assumptions. HICP inflation excluding energy and food is revised down slightly in the near term reflecting weaker data outturns.

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