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Economic Research: Eurozone Economic Outlook: Consumers Won’t Give Up In 2020

Chart 1


Outlook 2020: More of the same, low growth and an unbalanced policy mix

The year 2020 should be another year of below potential growth for the eurozone, but not one of recession. We expect GDP to rise by 1.0% in 2020 and 1.2% in 2021 after 1.2% in 2019 (see table 1 at end of article for our forecasts). S&P Global Ratings Research's recession indicator points to a receding risk of around 8% for the next 12 months (see chart 1 above).

While recent data suggests the industrial slump might be bottoming out, we do not expect a sharp rebound in industrial activity. Why? The outlook for external demand remains meager. Trade tensions will continue to barrier trade globally, while the slowdown of the Chinese and U.S. economies mean import demand for European goods will remain subdued. As a result, growth must continue to come from domestic demand--household consumption and investment in housing. France and Spain will outperform the eurozone thanks to their more services-led economies, while Germany's and Italy's, more dependent on manufacturing exports for growth, will continue to suffer from weak external demand.

The policy mix is likely to remain unbalanced (see "Low Growth And Lower Rates: The Eurozone In 2020," published on Sept. 26, 2019). The European Commission expects fiscal policy to remain close to neutral next year, which means monetary policy will do the heavy lifting again. If and when the data flow fails to show more signs of improvement to growth, we think the ECB will have to cut its deposit rate by another 10 basis points, perhaps in March 2020. That said, given a backdrop of unprecedented easing since the last crisis, monetary policy is slowly running out of firepower. Any fiscal stimulus would therefore be a welcome upside risk to our 2020 scenario. It simply would be more effective for reflating the economy than lowering interest rates further. For now, we stick to the view that the ECB is unlikely to end quantitative easing before 2021 or raise rates before 2022. The main downside risk to growth--a potential further escalation in trade disputes--has not evaporated, making it more likely that the weakness in manufacturing could translate into weaker labor markets and therefore weaker domestic demand.

Will the European consumer turn its back on the European economy?

The eurozone economy has avoided recession this year thanks to a strong labor market that has lifted consumer spending. However, industrial activity remains weak, and we are starting to see a slowdown in job creation (see chart 2). However, we're finding three other reasons for optimism about European consumers next year and expect household consumption in the eurozone to rise by 1.2% in 2020, the same pace as in 2019:

The European services sector accounts for most economic activity.  Industry provides for only 5.4% of eurozone jobs, with the European services sector making up for the lion's share of economic activity (see chart 2). Therefore, although employment expectations remain negative in manufacturing, the uptick in services and construction since this summer is a positive.

Vacancy rates are still at an all-time high, pointing to further declines in unemployment.  The unemployment rate is now at 7.5%, the lowest since 2008. As vacancy rates are also still at an all-time high and based on our outlook for growth, we expect employment to grow by 0.6% in 2020 and 2021, pushing down the unemployment rate to 7.3% by 2021.

Households are likely to get another decent boost in purchasing power thanks to strong wage growth and low inflation.   Wages are rising at their highest pace since 2009 (see chart 3). Admittedly, we expect them to moderate next year, but as long as labor markets remain tight, firms will remain under pressure to pay higher wages to retain and attract employees. Meanwhile, we expect eurozone inflation to remain at 1.2% next year because energy prices are set to remain relatively stable (see chart 4). We also think companies, sensing weaker demand, will likely shy away from steep price increases so they can retain market share (see chart 5). The result is shrinking margins, which is happening quickly in Italy and Germany. The exception is France, not only because of a business mix that is rich in services, but also because of labor market reforms, which have lowered the tax wedge--the difference between total labor costs to the employer and the corresponding net take-home pay of the employee.

Chart 2


Chart 3


Chart 4


Chart 5


Stronger gains in consumption are unlikely, though, because we do not expect the household savings rate to decline--despite recent gains. Because of low to negative interest rates, people are forced to save more today to achieve a similar standard of living when they retire. This is especially a problem for households that do not own their homes (such as in Germany or Switzerland, where rates are also negative). Lower homeownership is associated with higher savings (see chart 6). For these savers, low rates have two consequences. They are seeing lower or negative returns on their savings, which have prompted some Dutch pension funds to reduce pension payments to retirees. What's more, they will likely pay higher rent because low borrowing rates have made the housing market more attractive, therefore driving up property and with it rent prices (see chart 7 and "Housing Markets Lose Speed As The Economy Weakens," published Sept. 24, 2019). That said, the link between rent and house price inflation is not always clear cut. Rent controls, low rental turnover, and subsidized housing may weaken the link between the two.

Meanwhile, for prospective homeowners, low interest rates are boosting affordability, but rising house prices mean they need to put more money aside for their investment. As a result, mortgage loan maturities are lengthening in most European housing markets, and loan-to-value ratios are on the rise. All other things being equal, this means that consumers will have less money for consumption. To conclude, the eurozone economic outlook for 2020 is much like 2019's. Monetary policy and households will continue to support economic growth in the eurozone. The same cannot be said for external demand and fiscal policy.

Chart 6


Chart 7


Table 1

S&P Global Ratings' European Economic Forecasts (November 2019)
Eurozone Germany France Italy Spain Netherlands Belgium U.K. Switzerland
GDP (%)
2018 1.9 1.5 1.7 0.7 2.4 2.5 1.5 1.4 2.8
2019 1.2 0.5 1.3 0.2 2.0 1.7 1.3 1.3 0.7
2020 1.0 0.5 1.3 0.4 1.7 1.3 1.1 1.0 1.1
2021 1.2 1.0 1.3 0.6 1.6 1.4 1.2 1.7 1.4
2022 1.3 1.1 1.4 0.7 1.6 1.5 1.2 1.6 1.5
CPI inflation (%)
2018 1.8 1.9 2.1 1.2 1.7 1.6 2.3 2.5 0.9
2019 1.2 1.4 1.3 0.7 0.9 2.6 1.4 1.8 0.4
2020 1.2 1.4 1.1 0.7 1.2 1.4 1.6 1.6 0.2
2021 1.3 1.5 1.4 1.1 1.4 1.4 1.6 1.7 0.5
2022 1.5 1.6 1.6 1.3 1.6 1.6 1.8 1.9 0.6
Unemployment rate (%)
2018 8.2 3.4 9.1 10.6 15.3 3.8 6.0 4.1 2.6
2019 7.6 3.2 8.5 10.0 14.0 3.4 5.6 3.9 2.4
2020 7.4 3.3 8.3 9.9 13.2 3.4 5.7 4.1 2.5
2021 7.3 3.4 8.1 9.8 12.7 3.4 5.7 4.4 2.5
2022 7.2 3.4 8.0 9.7 12.3 3.4 5.7 4.5 2.4
10-year government bond (%)
2018 1.2 0.5 0.8 2.6 1.4 0.6 0.8 1.5 0.0
2019 0.4 -0.2 0.1 1.9 0.6 -0.1 0.2 0.9 -0.5
2020 0.3 -0.2 0.2 1.2 0.6 -0.1 0.2 0.9 -0.3
2021 0.7 0.1 0.5 1.6 0.9 0.3 0.6 1.5 0.0
2022 0.9 0.3 0.8 1.9 1.2 0.5 0.8 1.9 0.2
Exchange rates
Eurozone U.K. Switzerland
2018 1.18 1.34 1.13 0.98 1.15
2019 1.12 1.28 1.14 0.99 1.11
2020 1.12 1.31 1.18 0.99 1.11
2021 1.15 1.33 1.16 0.99 1.13
2022 1.19 1.38 1.16 0.98 1.16
Policy rates
Eurozone (ECB) U.K. (BoE) Switzerland (SNB)
Deposit rate Refi rate
2018 -0.40 0.00 0.60 -0.75
2019 -0.43 0.00 0.75 -0.75
2020 -0.58 0.00 0.86 -0.75
2021 -0.60 0.00 1.11 -0.75
2022 -0.39 0.00 1.36 -0.50
Source: S&P Global Ratings.

This report does not constitute a rating action.

Senior Economist:Marion Amiot, London + 44 20 7176 0128;
EMEA Chief Economist:Sylvain Broyer, Frankfurt (49) 69-33-999-156;

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