Will the European Central Bank change its tune?by Paul Wallace / November 29, 2018 / Leave a comment
In 2017 the euro area turned the tables on its critics, growing at 2.4 per cent, its fastest for a decade. But as 2018 draws to a close there is less to celebrate. First the pace of growth slackened and now it has become a crawl. As the outlook darkens, will the European Central Bank offer fresh succour when its governing council meets on 13th December?
In the first half of 2018 the slowdown in Europe’s 19-strong monetary union appeared both predictable and manageable. The euro area had expanded by a heady 0.7 per cent in late 2017. The deceleration to a quarterly rate of 0.4 per cent until June brought growth into line with underlying potential, set by productivity and labour resources. However, the position deteriorated further in the third quarter, when growth fell to a meagre 0.2 per cent.
At first sight, the slowdown in the third quarter appeared to be a blip, caused in particular by an abrupt fall in car production as the motor industry struggled to comply with a new emissions standard. Consistent with this interpretation, Germany with its big car sector did especially badly, with GDP actually falling by 0.2 per cent in the third quarter. Yet this view was too sanguine since there was weakness elsewhere in the euro area, notably in Italy where output stagnated.
More tellingly, the setback to growth is persisting into the fourth quarter. A widely watched gauge of current conditions is an output index, compiled by IHS Markit, a data provider, which is based on monthly surveys of purchasing managers. This indicator, which covers private services as well as manufacturing, fell in November to its lowest in almost four years.
Factories in particular are suffering as orders and exports dwindle. Output from them is at a virtual standstill, the most sluggish since the current economic recovery got underway over five years ago. The manufacturing sector that drives the German economy—which in turn propels the eurozone, making up almost 30 per cent of its output—is idling.
The slowdown reflects an underlying vulnerability in the euro economy: the extent to which its growth is geared to that of the global economy. It is no accident that the monetary union did so well in 2017 when world trade put on a burst…