Eurozone Economic Growth To Grow Lower Than Expected

According to the World Bank, the Eurozone is expected to grow at a rate of 1.2 and 1.4 percent in 2019 and 2020, respectively, lower than the 1.6 percent growth recorded in 2018.

The projected 2019 growth was revised lower by 0.4 percentage points, following dampened sentiments in major economies such as Germany, which has seen reduced private consumption, and declining industrial production, as shown by the Purchasing Managers Index (PMI) reading of 45.4 in June 2019.

Uncertainty over Britain’s exit from the European Union (“Brexit”) has also led to increased uncertainty in the Eurozone regarding its impact, and the type of exit deal to be adopted by the UK, as well as elections for the incoming Prime Minister,  expected on 22nd July 2019, following the resignation of Prime Minister Theresa May.

Germany, France, and Italy recently highlighted plans for accommodative fiscal policy, through limited tax plans and increased government spending, to boost economic performance.

The European Commercial Bank (ECB) maintained the base lending rate at 0.0 percent, and the rates on the marginal lending facility and deposit facility at 0.25 percent and (0.40 percent), respectively, indicating that it was unlikely to make changes to the policy rate until the end of the year.

With the ECB having completed its Quantitative-Easing program, they are likely to adopt a more accommodative monetary policy through the use of Targeted Long-Term Refinancing Operations (TLTRO), which essentially involves the Central Bank issuing loans to commercial banks, for onward lending to commercial enterprises and households, so as to consequently spur economic activity and boost spending. Inflation has remained subdued, currently at 1.2 percent, below the 2.0 percent target.

The bank highlighted its plan to push the inflation to close to its 2.0% target, largely through increased accommodative monetary policy.

The Stoxx 600 index rose by 13.8 percent in H1’2019, with the P/E ratio currently at 17.0x, 13.1 percent below the historical average of 19.5x, indicating markets are currently trading at relatively cheaper valuations.