In the euro area economy, the first flowers have started to bloom , with February's Service PMIs showing a rebound. However, the cold winter months are not over yet, as the European Commission (EC) cut its 2019 growth forecast for the euro area from 1.9% to 1.3%. The grounds are particularly frozen solid in Italy and Germany, where Italy remained in recession and German growth stagnated in Q4 18.
The German and euro area economies still hold all the ingredients for a domestic demand-driven expansion in light of rising real wages and falling unemployment. This picture was confirmed by the February PMIs, which showed a growing divergence between the manufacturing and services sectors : while manufacturing PMI dipped into contraction territory at 49.3, down from 50.5 in January, services PMI rose from 51.2 to 52.8. In particular, the rebound in French PMIs is welcome news, as it indicates that the impact of the 'Gilet Jaune' protests on French business activity is abating in Q1. While survey data increasingly point to a stabilisation of the euro area economy, the situation remains fragile, amid many risks to the outlook - from a no-deal Brexit to US car tariffs - still linger in the background. With a value of -0.1 our Danske growth tracker currently remains outside recessionary territory but the risk of a recession lurking in the background remains elevated (see also Euro Area Research - Is the euro area heading for recession? , 4 March) .
The threat of US import tariffs on European cars has come back into the limelight. President Donald Trump has until 18 May to act on the (undisclosed) recommendations of a report on the US national security threat posed by car imports. Germany's car industry would be the main casualty and according to an ifo study such tariffs could lower German car exports to the US by almost 50% and reduce German real GDP by around EUR5bn (0.2% of GDP). Although US car tariffs remain one of the biggest risks for the fragile euro area economy in the near term, we attach a relatively low probability at the current stage of such tariffs coming into effect.
Minutes from the January ECB meeting revealed that policymakers are in no hurry to react to the economic slowdown , instead awaiting more clarity on whether it proves to be of a temporary or more persistent nature. We believe in the former and expect the ECB to await further data before taking a decision in terms of policy implications. Market expectations continue to be on the dovish side, with a 20bp interest rate hike only priced in by December 2020. In line with the EC, the ECB is likely to lower its growth and inflation outlook at the 7 March meeting but we still do not expect another liquidity operation (TLTRO) at this stage (see also ECB Preview - No TLTRO announcement as ECB waits for further data , 1 March) .
The February euro area inflation figures showed headline inflation rising slightly to 1.5% y/y, driven by higher food and energy prices, while core inflation fell back to 1.0% y/y from 1.1% y/y in January. The latter is disappointing and the (so far) missing transmission from wages to consumer prices is becoming an increasing worry for the ECB , as the January minutes also revealed.
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