Dismal outlook for Eurozone despite stimulus

 In Newsletter

The European Central Bank announced a new round of quantitative easing (20 billion euros a month in asset purchases) earlier this month and cut its benchmark deposit rate to a record low -0.5%.

 

The eurozone has been stuck in slow or negative economic growth for a decade, and unfortunately expectations are low that the current round of stimulus is the answer to the region’s challenges.

 

The ECB has reason to be concerned about the economic outlook. The region’s manufacturing PMI is on track to hit a nearly seven-year low in September, and the underlying data tracked by Complete Intelligence points to weakening growth through the end of the year. Our machine-learning algorithms, trained on billions of data points over years of forecasting, see GDP growth for the eurozone hovering at about 1% the rest of this year. Inflation should be at about the same level — that’s about half of the ECB’s target of 2%.

Europe Consumer Price index VS GDP Annual Growth Rate

Europe Consumer Price index VS GDP Annual Growth Rate

This chart was generated using CI Futures. Book a demo to see it in action.

 

If the economic picture is bad, at least equity markets have been holding up, and should continue to tread water. A broad measure of European equity markets is forecast to be roughly flat through the end of the year on the back of aggressive ECB easing and the competitive depreciation helping exports. By comparison, we see US equity markets rising again by November after a slight dip in October.

MSCI Europe Index Futures (FMEU1) VS United States S&P 500 Stock Market Index (SPX)

EUR/USD Rate Forecasts Until Nov 2019

MSCI Europe Index Futures (FMEU1) VS US S&P 500 Stock Market Index (SPX)
EUR/USD Rate Forecasts Until Nov 2019

This chart was generated using CI Futures. Book a demo to see it in action.

 

All this stimulus will likely mean further weakening in the euro. Our forecast calls for the euro to fall below 1.08 to the dollar by October, with further downside likely.

 

As Europe struggles, the UK’s excruciating Brexit drama continues. While we steer clear of politics, the economic outlook favors the UK, as we’ve written here. Our models have been  telling us the Pound should begin to stabilize this month and may rally slightly into Q4. The basic assumptions could of course change with any final Brexit decision, but this is the current state of play for companies devising strategy and investment plans for the region.

United Kingdom / Germany / France GDP Annual Growth Rate

 

United Kingdom / Germany / France GDP Annual Growth Rate
GBP/USD Rate Forecasts Until Nov 2019

This chart was generated using CI Futures. Book a demo to see it in action.

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