20180524-NATIXIS-Euro_zone__Could_growth_fall_abruptly_in_2019__7页_795kb

Flash Economics Summary

Core Content

This document from Natixis analyzes the potential for abrupt growth decline in the euro zone in 2019, despite the consensus forecast of only a small slowdown. It evaluates four possible mechanisms that could lead to a sharper decline in growth and concludes that while some risks are present, they are not immediate.

Main Forecast

• The consensus forecast for euro zone real GDP growth in 2019 is 1.9%.
• The European Commission forecasts 2.0%, and the IMF and OECD predict 2.0% and 2.1% respectively.
• The ECB expects a slight slowdown to 1.9%.

Key Mechanisms Analyzed

1. Sharp Rise in Interest Rates

• The ECB is expected to end quantitative easing in 2018 and begin raising interest rates in mid-2019.
• However, the ECB's cautious approach and weak reaction to U.S. rate hikes suggest that interest rates in the euro zone are unlikely to rise sharply.
• This implies limited impact on growth from interest rate increases.

2. Acceleration in Labour Costs and Fall in Profitability

• Nominal per capita wages have increased, but this has been offset by productivity gains, resulting in stable unit labour costs.
• Corporate profitability remains high, and there is no evidence of wage growth being affected by the unemployment rate.
• Therefore, a significant fall in profitability and investment is unlikely.

3. Hiring Difficulties for Companies

• Companies in the euro zone are facing significant hiring challenges, even though the unemployment rate is still relatively high.
• These difficulties suggest that the unemployment rate may be approaching the structural rate, which could eventually lead to a return to potential growth levels.
• However, there is currently no visible slowdown in employment, so the impact on growth is not immediate.

4. Oil Prices

• A sharp increase in oil prices over the past year has eroded real wages and reduced household demand.
• The loss of real income due to oil price increases is estimated to be around 1.5 percentage points of GDP, which is a significant factor.
• This could lead to a slowdown in consumption, potentially affecting growth in the future.

Key Findings

• Interest rate hikes are unlikely to cause a sharp decline in growth due to ECB's cautious stance.
• Labour cost acceleration and profitability decline are not currently occurring.
• Hiring difficulties are a growing concern but have not yet impacted employment significantly.
• Oil price increases are a major risk, as they reduce real wages and household demand, with a potential 1.5% GDP impact.

Conclusion

While the euro zone is expected to experience only a small slowdown in growth in 2019, several factors could lead to a more abrupt decline. These include:

• Oil price volatility and its effect on real income and consumption.
• Potential future hiring challenges that may affect employment and growth.
• Long-term risks from structural unemployment and possible future interest rate adjustments.

Currently, the most pressing concern is the impact of rising oil prices, which could significantly reduce household demand and lead to a slowdown in consumption. However, the immediate risk of a sharp fall in growth appears low.

Disclaimer

• This document is intended for professional and qualified investors only.
• It is confidential and not for public distribution.
• No liability is accepted for any use or interpretation of the information.
• The views expressed are those of the authors and do not reflect the views of Natixis or any of its affiliates.
• No personalized investment recommendations are provided.
• The information is based on public data and not verified by Natixis.