Euro area GDP growth slowed substantially in 2018 as net trade turned from a substantial tailwind to a small drag on growth. Hard data from the early part of the year have provided mixed signals but are not pointing to an imminent recession.
Meanwhile survey data, which deteriorated rapidly in 2018, appear to have stabilised since the turn of the year. Indeed, Fathom’s aggregate euro area Economic Sentiment Indicator (ESI) ― which distils the information from numerous business and consumer surveys into a single composite indicator ― ticked up to 0.5% in February, after having declined by 0.9 percentage points in 2018.
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At their current levels, the ESIs suggest that sentiment remains positive while loose macroeconomic policy (both fiscal and monetary) is also supportive of growth and should be sufficient to offset headwinds from political uncertainty and trade.
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As a result, Fathom’s view is that growth is likely to remain close to its current pace of 0.2% per quarter, with the economy likely to expand by 1.2% over the year as a whole. While this rate may not immediately appear impressive compared to historical norms, it remains slightly above Fathom’s central estimate of the currency bloc’s post-crisis trend rate of growth.
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Further validation of Fathom’s views comes from labour market developments, with the euro area unemployment rate maintaining its downward trajectory towards the end of 2018, even dipping below 8% for the first time since 2008.
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However, Fathom’s estimate of potential growth — which is jointly determined by demographic changes and productivity growth ― is far lower than that of most official forecasters. Consequently, despite having similar growth forecasts to Fathom, the ECB is likely to interpret them in a far less positive manner. Indeed, the central bank has already stated a commitment to keep rates on hold this year, and Fathom does not expect policymakers to raise rates next year either.
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