The Eurozone economy has been underperforming the rest of the world for the past year prompting speculation over what measures the European Central Bank (ECB) may take to stem the flow.
A lot of the weakness has been coming through the German manufacturing industry and, in particular, car manufacturing, but with much of the weakness specific to that sector it might pass through over the next few months.
Trade war risks bite
The more potentially significant issue is the negatives for the Eurozone and the German export industry from the US-China trade war. We’ve seen the trade war risks step up another notch recently with the US imposing more tariffs on Chinese imports and China responding by allowing its currency, the Renminbi, to fall below seven to the US dollar and reportedly ordering state-owned enterprises to halt imports of agricultural products from the US.
With such threats on the horizon it’s appears likely that the Eurozone economy will still remain pretty soft over the next six to 12 months and we’re likely to see the ECB respond with some more monetary stimulus, a move which the Bank flagged in July.
Quantitative easing and rate cuts
We expect a further ramp up of the European quantitative easing program to be announced following the next ECB monetary policy meeting in September, with expectations that they’ll announce a program that runs at about 30 billion euros a month. That should be positive in generating some more upside for inflation given that inflation in the Eurozone has been quite weak.
We’re also likely to see some interest rate cuts, and given that some interest rates in the Eurozone are now at negative levels, they may go even further negative.
After September, the next apparent big risk for the Eurozone is what happens around Brexit. While we believe Brexit is more of an issue for the UK economy it is still a risk that investors seem worried about in the near term.
Subscribe to SMSF News below to receive my latest articles straight to your inboxDiana Mousina, Senior Economist
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