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The Slowdown Cometh: Global Growth Outlook Suffers Another Body Blow In Deep EC Cuts

This was not digested particularly well.

This is hardly surprising in light of the recent data out of the bloc, but The European Commission has cut its growth forecasts for all of the euro-area’s major economies.

For some countries, the cuts are pretty steep. For instance, the forecast for Italy in 2019 was slashed by an entire percentage point to just 0.2%.

“In 2019, annual real GDP growth is forecast to fall to 0.2%, sizably less than anticipated in the autumn forecast”, the EC writes, before expounding as follows:

A worse-than-expected cyclical slowdown in 2018, amplified by global and domestic policy uncertainty and firms’ substantially less favourable investment outlook, largely explain this downward revision. Moreover, the more marked slowdown of important trade partners is likely to have knock-on effects on Italian manufacturing output. Following the budget revision in December 2018, sovereign yields eased, but are still significantly higher than a year ago.


As you’re no doubt aware, Italy fell into a recession in Q4, something Di Maio blamed on previous governments and a state of affairs PM Conte insists will prove fleeting.



Poor Giovanni Tria – the country’s embattled finance minister who tried unsuccessfully to talk some sense into Di Maio and Salvini last September before the two firebrands kicked off their budget battle with the EU – was out on Thursday attempting some damage control. 

“The economic slowdown might be reduced already in the current quarter and we may see a return to growth,” he told lawmakers in Rome, adding that “we are telling investors that commitments made by the government will be respected.”

That’s nice and all, but “investors” are “telling” Italy today that things aren’t looking great. 10-year yields rose to their highest levels in a month, leaping 10bps after the EC forecast cuts came down.



Italian banks sold off on the news.



And the nefarious “lo spread” snapped wider and is now on track for its second-largest monthly widening since the May BTP meltdown.



Of course Italy isn’t the only economy in Europe that’s in trouble. The outlook for Germany is rapidly deteriorating (and I don’t think that’s hyperbole). We’ve documented this on a near daily basis of late including on Wednesday, when data showed factory orders fell for a second month in December. The YoY drop was the largest since 2012.

“With world trade and global economic growth cooling down this year and next, export growth is unlikely to soon regain the dynamism of 2014-2017”, the EC wrote Thursday, explaining the decision to slash their outlook for Germany. Here’s some additional color:

This is also likely to restrain new business investment. Indeed, high frequency indicators point to a continued deterioration in business sentiment in the manufacturing sector, with declining orders and a worsening export outlook. On the other hand, housing investment and private consumption should continue to sustain a moderate upswing helped by the positive developments on the labour market and fiscal measures boosting household incomes. Overall, real GDP growth is expected to cool further to 1.1% in 2019.


Bunds rallied on the news, with 10-year yields now back below 12bps (to the lowest since 2016) and March futures surged, hitting a contract high of what looks like 166.21 from where I’m sitting.



US equity futures took the news pretty hard and given that some of this was expected, the reaction is a bit puzzling. That said, this is just more “validation” (as we put it on Wednesday) of the global slowdown narrative and one assumes it’s likely to raise even more questions about the feasibility of Italy’s budget/targets/etc.

As for the ECB, well, the pressure is building. Don’t be surprised if there’s a dovish Reuters trial balloon sooner rather than later.

Italy forecast


Germany forecast


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