Euro zone: A slowing economy with pumping markets
05.02.2020, 10:43

Euro zone: A slowing economy with pumping markets

After the global economy has sharply slowed in the last two quarters of 2018, it was possible to observe weakly economic growth over last year.

The euro area turned out to be affected by the slowing world economy, which was marked by geopolitical tensions and the uncertainty caused by Brexit throughout the year. As a result, its gross domestic product (GDP) growth slowed and was revised downwards, being expected to increase 1,1% in 2019.

This political and trade instability led companies to become reluctant to invest. The industrial sector, for example, has been in recession throughout the year and only about 20% of GDP growth is explained by investment and trade.

Private consumption was, however, the main variable responsible for fighting a slowdown that could have led to a recession. Responsible for more than two thirds of the European growth, the constant increase in consumption is partly due to the sustainable rise in employment. Unemployment fell from 9.5% in 2017 to 7.5% in 2019 and was accompanied by a rise in wages at a rate of 2.6%. Despite the fact that these indicators are performing relatively well, the increase in household savings and drop in purchases of durable goods suggest a possible future decrease in consumption growth.

When it comes to macroeconomic policy, the European Central Bank (ECB) has kept its expansionary monetary policy with its inflation target rate of below, but close to 2%. That is still distant away from being reached as the current rate is 1%. Moreover, it is thought that the non-accelerating rate of unemployment (NAIRU) - consistent with a stable inflation rate close to 2% - may be between 5-7%. Thus, there is still scope for a reduction in unemployment, which may in turn lead (according to the Phillips curve) to the desired rise in inflation and a consequent approximation of the eurozone economy to its potential.

Usually, the real economy tends to respond to an environment of low interest rates, and regardless the geopolitical tensions throughout the year, investors sought the equity market as a source of investment. The European Stoxx 600 index had its best year since 2009 and the third best of the last two decades with a growth of 24%. Furthermore, the unconventional policies of the ECB have led to a continued decline in the yields of the bond market. However, greater diversification in safe haven assets was apparently sought with the price of gold having the biggest rise in the last 9 years with an increase of 15%.

In the Portuguese case, the economic activity remained resilient in the first half of the year. Private consumption benefited from a labor market whose demand for workers by companies is greater than supply. Consequently, as wages increased and inflation lowered, disposable income rose.

Domestic demand was also supported by a strong business investment. Export growth slowed slightly and confidence deteriorated in the second half of the year, reflecting the growing uncertainty of trade tensions. In addition, confidence indicators in services, consumers and construction have stabilized. As a result, economic growth is expected to be 1.9% in 2019.

The Portuguese stock exchange ended up following the European trend, where PSI-20 index rose about 11% in 2019 - a positive performance, yet below the European average. In Lisbon, two thirds of listed companies closed the year with a positive sign, having eight companies gained more than 10%.

There are therefore reasons to be optimistic that the good performance of the markets may perdure, at least in the short term. Although the Brexit vote on December 20 has reduced uncertainty, the expected difficult negotiations between the European Union and the United Kingdom deserve special attention from investors. In addition, there are reservations to global trade flows, where a possible easing of geopolitical tensions may reduce future challenges in the region.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Indiscriminate reliance on illustrative or informational materials may lead to losses.

  • Name: Frederico Aragao Morais
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