The region’s growth is likely to pick up as economic indicators improve, but the trade spat with the United States continues to cast a shadow.

One of the big stories in the first half of 2018 was the deceleration of growth in the eurozone. However, the region’s material downshift appears to be coming to an end. There are clear signs of stabilization in many growth indicators, including the services industry, and many indicators have turned up a little. Putnam’s European Nowcast Index, which is quite sensitive to changes in momentum, has also edged up a reasonable amount. Economic growth had slowed to 0.4% in the first quarter — the weakest in six quarters — after expanding 0.7% at the end of 2017 as manufacturing eased and the euro strengthened.

Gathering trade clouds

There are certainly clouds. European business sentiment has deteriorated largely because of the risk that the trade conflict could become more serious. Eurozone economies are also feeling the effects of higher energy prices a little more than the United States. But domestic demand growth remains quite steady, consumer confidence is high, unemployment is falling, and consumers are in good shape. Wages are lagging the overall recovery a little, as they are in most of the world, but they are going up. And in Germany at least, there is a modest fiscal relaxation underway.

European business sentiment has deteriorated largely because of the risk that the trade conflict could become more serious.

The domestic service sector is providing some offset to the concerns of the exporting manufacturers. Corporate cash flow is strong. If the trade conflict worsens, the eurozone will be affected. We consider this to be a serious risk. But it’s not our central scenario. The central scenario envisions the eurozone will continue to grow at a reasonable pace.

A dovish stance on rates

The European Central Bank (ECB) in June decided to end its €2.6 trillion bond purchase program by the end of 2018. but ECB President Draghi sent dovish signals to the markets about the likely path of rate hikes once quantitative easing (QE) ends. The ECB indicated rates would remain unchanged “through the summer of 2019,” and Draghi delighted in the lack of specificity. Inflation hit 2% in June for the first time in more than a year, supported by higher oil prices. The pickup in the inflation rate was just above the ECB’s target.

Draghi was anxious to balance one potentially hawkish message with another dovish one, and he has to manage the wide range of opinions on the ECB Governing Council. More recent commentary from the hawks, however, suggests they are not entirely happy with the dovish comments Draghi made about the likely timing of the first hike. They spent a long time getting a firm date for the end of QE, and they wanted to lay down a marker that they expect a rate hike to follow afterwards. It’s hard to get too excited about all this. We have always known there are hawks at the ECB, and no one can be too confident now about what will happen in the fourth quarter of 2019.

The ECB indicated rates would remain unchanged “through the summer of 2019,” and Draghi delighted in the lack of specificity.

But the hawks are a little unhappy about the weakness in the euro. Their recent comments are a useful reminder that there could be a faster pace of hikes in. While that is not a likely scenario, it’s not out of the question. Our inflation forecast continues to suggest there is no reason for the ECB to rush on tightening policy.


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While the outlook for global growth is favorable — albeit less synchronized — the view could change if the Federal Reserve overtightens and trade spats escalate.