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S&P says eurozone in secular stagnation, sees growth slowing to 1.1% in 2020

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S&P says eurozone in secular stagnation, sees growth slowing to 1.1% in 2020

The eurozone economy appears to have entered secular stagnation — an environment of weak growth, muted inflation and negative interest rates — that may extend into 2020, S&P Global Ratings said in new research.

In 2020, the rating agency expects real GDP growth in the eurozone to slow to 1.1% from an estimated 1.2% expansion in 2019. Inflation is projected to fall to 1.1% in 2020 from 1.3% in 2019, while average central bank policy rates are forecast to remain in negative territory.

Eurozone economic weakness will likely reach into 2020 considering that external demand is not expected to recover amid global trade tensions, according to S&P Global Ratings.

"The economy is slowly starting to feel the effects of the trade-related manufacturing slowdown," the rating agency said. "Capacity pressures and employment expectations are all easing, pointing at a deceleration in investment."

In addition to trade tensions hurting economic activity, the eurozone is also saving more than it invests despite negative rates, thus failing to spur growth. Companies in the region also remain highly leveraged, which is limiting growth and rates, S&P Global Ratings said.

"Although less credit-fueled growth likely means the sources of growth are more sustainable, it also means there is less investment in the economy and thus lower potential growth," the rating agency said.

S&P Global Ratings said secular stagnation can be reversed, suggesting that governments could borrow more to fund projects that would drive growth. "Fiscal policy should come to the rescue," it said.

The European Central Bank on Sept. 12 unveiled a stimulus package, which included a reduction in the deposit facility rate and a restart of bond purchases.

S&P Global Ratings said the ECB is not expected to raise interest rates before 2022.

The ECB lowered its growth forecasts for 2019 and 2020 to 1.1% and 1.2%, respectively, from 1.2% and 1.4% in the bank's June projections.