What’s Next for European Monetary Policy?

As European Central Bank (ECB) policymakers adjust the budget to reflect lighter eurozone economic activity, moderate economic growth and the United Kingdom’s departure from the European Union (EU), David Zahn, our Head of European Fixed Income, shares his macroeconomic outlook for the region. He weighs in on why the ECB could remain accommodative.

It’s no surprise we’ve seen some challenges to global economic growth arise, first with lower export growth in 2019 and this year, the coronavirus outbreak that originated out of China. We think the virus will likely be a one-time knock to eurozone gross domestic product (GDP) growth for the first half of 2020; then, we’d expect growth to likely recover back to current levels later in the year.

Many countries in the eurozone composite purchasing managers’ index (PMIs), a much-watched indicator of economic activity, are in contractionary territory—Germany is the main culprit as the largest exporter out of Europe with a large exposure to the slight slowdown in Asia. However, we believe most of the contraction is likely behind us, and would expect domestic demand for the rest of 2020 and beginning of 2021 to support moderate eurozone growth of around 1%.

It’s important to remember the European Central Bank (ECB) remains incredibly accommodative in its policy decisions. At the same time, countries such as France have gone through robust reforms, ranging from business investments, changes to employment laws and corporate tax cuts. Germany and the Netherlands have room to ease budgets, but we don’t expect much adjustment.

Over the years, the ECB has carried out a huge amount of quantitative easing (QE) through a renewed program. We think the ECB will want to stay focused on QE for the foreseeable future in a bid to boost inflation.