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EUROPE Macro Economy

Annual growth forecasts have been supported by surprising

levels of growth in the first quarter. However, persisting

uncertainty will continue to weaken overall growth in Europe.

In the first quarter of 2019, euro area GDP growth picked

up for the second consecutive quarter and increased by

0.4%. In the EU, GDP grew by 0.5%, and was higher than

the 0.3% seen in Q4 2018. In both areas, this represented

the 24th consecutive quarter of expansion. In Germany,

there was positive growth in GDP, after two quarters of

either contraction or stagnation. In Italy, there was also

an improvement in GDP, as it emerged from the recession

experienced in the second half of 2018. However, there

is evidence that these stronger-than-expected outturns

reflected a number of temporary or one-off factors. These

included mild weather, which lifted construction activity,

particularly in Germany. Also, there was a rebound in car

sales in the euro area following disruptions in the second

half of 2018 related to new test procedures. There was

a substantial increase in goods exported to the United

Kingdom, due to companies stockpiling in anticipation of

the original Brexit date at the end of March. Finally, growth

also benefited from fiscal policy measures, which boosted

disposable household incomes in several Member States.

Looking ahead, private consumption is expected to remain

strong, supported by a number of factors. This includes

above-average consumer confidence as well as a rise in net

wealth, due to rising house prices, stock market gains and

growing real incomes. Investment is expected to continue

expanding, but at a slowing rate of growth. For investment

outside of the construction industry, a number of factors

are set to weaken momentum. This includes weaker

trade, persisting policy uncertainty and a decline in profit

margins. The latter reflects the fact that higher wage costs

are not being matched by increased productivity growth.

Weak trade and policy uncertainty are also expected to

continue to have a drag effect on export-orientated and

capital-intensive sectors. Business investment may also be

dampened by both the recent decline in capacity utilisation

in manufacturing, and the end of targeted fiscal incentives

in some European States.

Overall, euro area GDP growth is forecast to slow from 1.9%

in 2018 to 1.2% in 2019, before picking up again to 1.4%

in 2020. This is on the back of a moderate improvement

in global growth and a higher number of working days in

some Member States. Overall, this means that the GDP

growth forecast for this year remains unchanged. However,

this apparent stability on an annual basis masks some significant

shorter term changes. This includes the surprising

growth levels in the first quarter, offset by weaker growth

expected in the second half of 2019. All EU Member States

are expected to experience growth in both 2019 and 2020.

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