A virus-free update: Economic outlook for Europe

February 12 2020

Giovanni ZanniChief Euro area Economist

View bio

Giles GaleHead of European Rates Strategy

View bio

Imogen Bachra, CFAEuropean Rates Desk Strategist

View bio

Other insights

View more insights

5 minute read

2020 started off on a better footing for growth and data in Europe. Despite the recent coronavirus episode, and how it might unfold, we remain moderately optimistic for the economic outlook. Here’s why.

The situation in Europe pre-virus was improving markedly

Weak-ish GDP in 2019

Gross Domestic Product (GDP) growth for the fourth quarter of 2019 came out on the weak-ish side, up just 0.1% quarter on quarter, slightly under the consensus expectation of 0.2%. The weakness largely stemmed from the continuation of the de-stocking episode: domestic demand, and in particular private and public consumption, did well instead.

PMIs and business confidence are up in January

2020 started on a better footing, with January Purchasing Managers Index data (PMIs) up, and new orders/inventories ratios at stretched levels – implying pent-up demand. The composite PMI reached its highest level since last August, with manufacturing pointing to a rebound, and services robust and resilient.

Business confidence improved as well, at a 16-month high. The fact that the most forward-looking components of the PMI were particularly positive further suggests that the situation pre-virus was improving markedly, and that a significant acceleration was on the cards. Moreover, we continue to project a positive impact on 2020 growth from past monetary decisions and from the fiscal boost already in the pipeline for this year, as embedded in 2020 fiscal budgets

The composite PMI reached its highest level since last August, with manufacturing pointing to a rebound, and services robust and resilient.

A virus-free forecast for the rest of 2020

No material change to our euro area scenario, yet

Clearly, there is a risk that all the improvement seen in January might go into reverse, as the impact of the coronavirus episode spreads to exports to China, tourism, and global value chains… However, the tailwind was considerable and, if anything, we were considering revising up our forecasts before the outbreak.

It is important to remember that the impact of these outbreaks is generally short-lived and recovery likely, read our approach to assessing the market impact. Moreover, our China economist Peiqian Liu, expects only a marginal impact on China’s 2020 GDP growth – concentrated in Q1. This is largely thanks also to a reactive economic policy, of which we have already seen the first opening rounds.

Overall, our current assessment is that these forces largely cancel out as far as the euro area is concerned, and we have kept our expectations for a moderate 1% GDP growth this year unchanged, see our 2020 Year Ahead Outlook. On the inflation side, we have acknowledged the fall in oil prices recorded since mid-January, with however only a marginal impact on our forecast for the year: down to 1.2% from 1.3% previously.

If anything, we were considering revising up our euro area forecasts before the coronavirus outbreak.

Was the ECB turning less cautious before the virus scare materialised?

In an interview with the FT (dated 27 January), the European Central Bank’s (ECB) Chief Economist, Philip Lane, sounded somewhat more optimistic than in previous speeches and interventions from the ECB, we believe. He argued that wage inflation was now entrenched and that inflation in services was not dead, being in the high 1s. He also pointed out that he wouldn’t put all his probabilities on the narrative of ‘everything inevitably low for longer’.

However, in light of falling oil prices and concerns for the economy on the back of the coronavirus episode, our best expectation is that the ECB will tone the message down again. In a sense, it is already happening – on 5 February; Lane said that euro area inflation is still too low. Meanwhile, Christine Lagarde, President of the ECB, stressed that the coronavirus outbreak adds a new layer to economic uncertainty.

What does all this mean for markets?

Since the coronavirus outbreak, many market participants have sold down riskier assets and sought comfort in safe-havens such as developed market government bonds, especially German government bonds (bunds).  This has since seen bunds rally, though markets have settled more recently – a pattern that is likely to repeat itself as stress over coronavirus ebbs and flows. Although bunds may appear attractive now, we’re still staying cautious in our outlook – a key theme we’ve been calling for a number of months now. As we saw in our Investor Survey, many investors are expecting too much pessimism for the European economy, and it is unwarranted in our view.

Regional focus: Europe

This document has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this document has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this document, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this document. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this document and any issues that are of concern to you.

This document does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.


Copyright 2020 © NatWest Markets Plc. All rights reserved.