News

Bruno Cavalier
Chief Economist at ODDO BHF

Among the leading developed economies, the Eurozone has recorded the sharpest economic slowdown since 2018, far exceeding expectations. Let’s turn the clock back one year. At that time, the general view, expressed for example by the consensus or the IMF, was that real GDP growth would reach 2.4% in the US, 6.2% in China and 1.9% in Europe. One year later, we can see how things turned out. For the US and China, the result is more or less in line with expectations, but for the Eurozone it is 0.7pts less than expected and, for Germany, it is 1.5pts lower. Why has the European economy been so weak, both in absolute terms and relative to its peers? And can it recover from this situation in the months and quarters ahead?

For the first question, encompassing both the weakness and underperformance of the European economy in 2019, there are at least three factors to take into account.

• The first relates to the Eurozone’s openness and sensitivity to external demand. The Eurozone is particularly exposed to shocks affecting world trade. It has consequently been hit by both the direct effects (volume of trade) and indirect effects (uncertainty) of the tariff war between the US and China, without forgetting the specific attacks it has faced from the Trump administration (increase in tariffs on industrial metals in 2018 and threat of tariffs on vehicle exports). To complete the picture, we should add Brexit-related uncertainty, which is mounting as the deadline approaches. All this had negative repercussions on business confidence.
• The second cause of weakness stems from the poor calibration of economic policy in Europe, or, to put it another way, the lack of stabilisation efforts. There has been intense ECB-bashing in the financial press and even in the popular press over the past few months, especially in Germany. We have lost count of the number of commentaries by bankers, central bankers, columnists and investors decrying the problems associated with negative interest rates (in a nutshell, they are responsible for the accelerating zombification of the economy). The negative interest rates problem is a serious one, but it is incorrect to pin all the blame on the ECB’s actions and, in any case, this has no bearing on the problem that concerns us here. The weakness of the European economy does not stem from the ECB’s policy being too accommodative. Negative interest rates have not caused a tightening of bank credit. They cause a redistribution of resources between agents (losers = banks and savers; winners = companies and states) whose net effect on activity has not been shown to be damaging to date. A more “normal” policy, if this word still has any meaning in relation to monetary questions, i.e. a more restrictive one, would not trigger an acceleration of European growth, quite the contrary. From an economic stabilisation standpoint, what the Eurozone is lacking today is a more accommodative fiscal policy. Between 2017 and today, the deficit of public administrations in the Eurozone has been near stable at 0.9% of GDP. Fiscal policy has been close to neutral after years of significant tightening. Over the same period, the US federal deficit has risen by approximately 1.5pts of GDP and is heading towards 5% of GDP. It hardly needs saying that the Eurozone would not have weakened as much in 2018-2019 if demand had been buoyed by a fiscal stimulus of some magnitude.
• The third cause of weakness is the situation in the automotive sector, which has moved headlong into an in-depth reorganisation spurred by environmental standards and electrification. With only a little exaggeration, we would be tempted to blame the severe industrial recession in Germany over almost the past two years on its oversized automotive sector relative to total production...

To answer the second question regarding the outlook, we need to examine if the factors of weakness described will last or not. One positive development is that world growth appears to have stabilised (at a trend rate of 3%). External demand addressed to Europe is no longer slowing and, if this trend continues, there are no reasons to fear another negative demand shock. Credit for this can be given to the global loosening of monetary conditions and selective stimulus measures on Chinese demand. What’s more, and although we need to tread carefully on this subject, it seems that Trump is ready to pause his attack on free trade – not because of a change of doctrine, but because the US economy is itself at risk of suffering, and Trump’s re-election hopes with it. Some progress has also been made on the Brexit front, with the prospect of an exit with a long transition period (while a trade agreement is negotiated) rather than the extreme scenario of a “no-deal Brexit”. On the European policy mix, no revolution is foreseeable in the short term. We do not see the ECB making a U-turn or fiscal policy being anything other than moderately stimulating. Though not much, this is better than nothing. As for the state of manufacturing, recent data suggests that the most acute phase of the correction is over, potentially paving the way for a catch-up. Overall, leaving imponderables aside (political risk here and there), employment and credit are the two cornerstones of domestic demand. Their resilience in 2019 points to slightly more encouraging growth in 2020.

Discover the full report

Disclaimer:

Disclaimer for Distribution by ODDO BHF SCA to Non-United States Investors:
This research publication is produced by ODDO BHF Corporate & Markets, a division of ODDO BHF SCA (“ODDO”), which is licensed by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the Autorité des Marchés Financiers (“AMF”).
The research, when distributed outside of the U.S., is intended exclusively for non-U.S. customers of ODDO and cannot be divulged to a third-party without prior written consent of ODDO. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This research has been prepared in accordance with regulatory provisions designed to promote the independence of investment research. “Chinese walls” (information barriers) have been implemented to avert the unauthorized dissemination of confidential information and to prevent and manage situations of conflict of interest. This research has been prepared in accordance with French regulatory provisions designed to promote the independence of investment research. The recommendation presented in this document is reviewed and updated at least quarterly following each Quarterly Report published by the issuer that is the subject of this Research Report.
At the time of publication of this document, ODDO and/or one of its subsidiaries may have a conflict of interest with the issuer(s) mentioned. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context which is subject to change without notice. The views expressed in this Research Report accurately reflect the analyst’s personal views about the subject securities and/or issuers and no part of his compensation was, is, or will be directly or indirectly related to the specific views contained in the Research Report. This Research Report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This Research Report is for institutional investors only. It may not contain information necessary for others to make investment decisions. Consult your financial adviser or an investment professional if you are not an institutional investor.
Disclaimer for Distribution by Oddo New York to United States Investors:
This Research Report is produced by ODDO BHF Corporate & Markets, a division of ODDO. This research is distributed to U.S. investors exclusively by ODDO BHF New York Corporation (“ONY”), MEMBER: FINRA/SIPC, and is intended exclusively for U.S. customers of ONY and cannot be divulged to a third-party without prior written consent of ONY. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This research has been prepared in accordance with regulatory provisions designed to promote the independence of investment research. “Chinese walls” (information barriers) have been implemented to avert the unauthorized dissemination of confidential information and to prevent and manage situations of conflict of interest. This research has been prepared in accordance with French regulatory provisions designed to promote the independence of investment research. The recommendation presented in this document is reviewed and updated at least quarterly following each Quarterly Report published by the issuer that is the subject of this Research Report.
At the time of publication of this document, ODDO, and/or one of its subsidiaries may have a conflict of interest with the issuer(s) mentioned. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context which is subject to change without notice. The views expressed in this Research Report accurately reflect the analyst’s personal views about the subject securities and/or issuers and no part of his compensation was, is, or will be directly or indirectly related to the specific views contained in the Research Report. This Research Report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This Research Report is for institutional investors only. It may not contain information necessary for others to make investment decisions. Consult your financial adviser or an investment professional if you are not an institutional investor.
Rule 15a-6 Disclosure:
Under Rule 15a-6(a)(3), any transactions conducted by ODDO, and/or one of its subsidiaries with U.S. persons in the securities described in this foreign research must be effected through ONY. As a member of FINRA, ONY has reviewed this material for distribution to U.S. persons as required by FINRA Rules 2241(h) applicable to dissemination of research produced by its affiliate ODDO.
FINRA Disclosures:
• Neither ONY, ODDO, nor ODDO BHF Corporate & Markets beneficially owns 1% or more of any class of common equity securities of the subject company.
• The research analyst of ODDO BHF Corporate & Markets, at the time of publication of this research report, is not aware, nor does he or she know or have reason to know of any actual, material conflict of interest of himself or herself, ODDO, ODDO BHF Corporate & Markets or ONY, except those mentioned in the paragraph entitled “Risks of Conflicts of Interest.”
• ODDO BHF Corporate & Markets or ODDO may receive or seek compensation for investment banking services in the next 3 months from the subject company of this Research Report, but ONY would not participate in those arrangements.
• Neither ONY, ODDO, ODDO BHF Corporate & Markets has received compensation from the subject company in the past 12 months for providing investment banking services except those mentioned in the paragraph of “Risks of Conflict of Interest”.”
• Neither ONY, ODDO, ODDO BHF Corporate & Markets has managed or co-managed a public offering of securities for the subject company in the past 12 months except those mentioned in the paragraph of “Risk of Conflict of Interest”.
• ONY does not make (and never has made) markets and, accordingly, was not making a market in the subject company's securities at the time that this research report was published.
Regulation AC: ONY is exempt from the certification requirements of Regulation AC for its distribution to a U.S. person in the United States of this Research Report that is prepared by an ODDO BHF Corporate & Markets research analyst because ODDO has no officers or persons performing similar functions or employees in common with ONY and ONY maintains and enforces written policies and procedures reasonably designed to prevent it, any controlling persons, officers or persons performing similar functions, and employees of ONY from influencing the activities of the third party research analyst and the content of research reports prepared by the third party research analyst.
Contact Information of firm distributing research to U.S. investors: ODDO BHF New York Corporation, MEMBER: FINRA/SIPC, is a wholly owned subsidiary of ODDO BHF SCA; Philippe Bouclainville, President ([email protected]) 150 East 52nd Street New York, NY 10022 212-481-4002.
Statement of conflict of interests of all companies mentioned in this document may be consulted on Oddo & Cie’s .