• In 2018, economic activity reduced both in the EU and on a global scale, with growth slowing down significantly.
• This decline is supposedly due to a slower global trade growth, high uncertainty regarding trade policies, the upcoming Brexit and an overall weak industrial production in the Euro area.
• With regard to the labour market, there has been an employment increase of 1.6%. Labour costs increased as well but prices remained at the same level.
• All sectors were affected by the declining global trade, except for the booming construction sector – an important segment for inland shipping – which remained resilient.
General economic conditions and outlook in Europe
- In 2018 the economic activity diminished both in the EU and on a global scale after a period of sustained potential growth in many major economies. Following the four quarters of 0.7% (q-o-q) GDP growth in 2017 in the Euro area, the growth slowed down significantly, with a GDP growth of only 0.4% in the first two quarters and further losses in the last two quarters with a GDP growth of only 0.2%. For the year 2018 in general, the GDP grown by 2.1% in the EU-27 and by 1.9% in the Euro area. The main drivers for economic growth in 2018 were domestic consumption and investments. The only European country that defied the economic slowdown in 2018 was Hungary, reaching a GDP growth rate of almost 5% (European Commission, Spring European economic forecast, Spring 2019).
- The main reasons for the decline are supposedly a slower global trade growth, high uncertainty regarding trade policies, the upcoming Brexit and an overall weak industrial production in the Euro area. Services on the other hand seemed to be more resilient to the economic slowdown. The trade tensions between China and the US were the main cause of high uncertainty, leading to high volatility and also to corrections of global financial market prices. These developments are being counteracted by new trade agreements, such as between the EU and Japan, or the CPTPP (Comprehensive and Progressive agreement for Trans-Pacific Partnership) which should support global trade (European Commission, Spring European economic forecast, Spring 2019).
- With regard to the labour market, there has been an employment increase of 1.6%. The most notable increase was in the construction sector, while employment growth in manufacturing has come to a standstill. However, the robust labour market was the driver for domestic consumption. In 2018, labour costs grew by 2.4%, but the labour cost pressures were not reflected in higher prices. The pass-through from wages to prices was not as high since companies squeezed their profit margins. This can be mainly explained by two factors: in times of low inflation, price diversion is narrower due to the fact that companies that raise prices attract the attention of the consumer, thereby risking the loss of market shares. The other factor is that costs are often passed on to prices when the demand is high, but with the recent negative demand shock, companies were reluctant to do so (European Central Bank, Mario Draghi speech, March 2019).
- Nevertheless, the worsening corporate earnings reports and trade tensions between the US and China, led to significant corrections of global stock market prices in the second half of 2018. Industrial production was falling further across countries and sectors except for the construction sector (for the construction sector, see also the outlook in chapter 9). In the first months of 2019, stock market prices recovered.
- ECB’s monetary policy has remained highly accommodative. While the ECB decided to end its net asset purchases in December 2018, ECB interest rates will remain at the current level at least through the summer of 2019, due to monetary policy stimulus, such as forward guidance on ECB policy rate and the reinvestments of the sizeable stock of acquired assets. During 2018 the Euro weakened by 1% in nominal effective terms against the Japanese yen and the pound sterling but remained strong against the US dollar.
- Regarding global trade, Euro area export volumes weakened throughout 2018, resulting in a growth rate of only 0.1% in 2018-Q3. Services exports on the other hand remain strong. Imports to the Euro area also slowed, but more gently than exports (European Commission, European economic forecast, February 2019).
GDP GROWTH RATES IN THE EU-28, IN THE EURO AREA AND PER COUNTRY(IN %),INCLUDING FORECAST FOR 2019 AND 2020
Sources : Eurostat [tec00115] and European Commission (European Economic forecast, February and Spring 2019) for the years 2019 and 2020