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Eurozone economic growth likely to fall to 2 pct in 2020, says Rabobank

Eurozone’s economic growth is expected to fall to 2 percent in 2020, according to a recent research report from Rabobank. When the Eurozone is churning out survey data pointing to annual growth rates in excess of 3 percent, it signals that things are not adding up somewhere and that some form of payback will come sooner or later. The March PMI survey came in below expectations for a second month in a row, falling a cumulative 3.6 points from its January highs.

The German IFO index had dropped by more than 3 points since its peak in November. In fact, the decline in surveys was fairly broad-based across the Eurozone. Moreover, signs of faltering momentum were not confined to surveys. Some slowdown has also been visible in more tangible data, such as a slowing growth in industrial production and a stalling pace in retail sales.

This all added up to a much more moderate pace of economic growth at 0.4% q/q, according to the advance estimate released this week. The disappointing data flow is also reflected by the sharp decline in our own (non-parametric) economic surprise index for the Eurozone, which has fallen to its lowest level since early 2016 and not far from the levels seen in 2011.

Indeed, the weak string of data also featured prominently in the ECB’s April rate setting meeting. In the press conference, the ECB president acknowledged that recent data weakness was pointing to some moderation in growth and that some softening of (underlying) demand could not be ruled out. And, amidst a threat of rising protectionism, it was something that required monitoring.

Mr. Draghi warned that an escalation in the trade war could have a “profound and rapid” effect on confidence, which in turn could affect the growth outlook. However, Draghi also highlighted that the recent weakness in data followed high growth in prior quarters and that the underlying strength continues to support its confidence that it will achieve its inflation aim over the medium term. He pointed specifically at surveys still being above long-term averages.

Meanwhile, temporary factors such was weather conditions, the timing of holidays, but possibly also some supply constraints in some sectors, needed to be taken into account. The latest PMI surveys (April), which broadly speaking stabilised, are the first indication that things are not deteriorating further, or at least not in a significant way.

"Our recession risk model suggests that the recent flow of weak data merely points to a moderately elevated recession risk (25 percent in April). We would need to see readings in excess of 40 percent to make this a more acute issue," the report added.

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