DBRS Publishes Macro Update for Europe

DBRS Ratings Limited published its latest edition of the Macroeconomic Update covering Europe. The publication provides DBRS Views and Key Trends in the Euro area (EA) and the United Kingdom (UK) in the near term.

In the EA, DBRS expects modest growth in the rest of the year, mainly reflecting external factors, despite stronger-than-expected growth at the beginning of 2019. The top growth performers in Q1 2019 were small economies – Malta, Estonia, Lithuania – while the underperformers included the three largest EA economies – Italy, Germany, France – plus Belgium and Finland. External uncertainties over an escalation in protectionism and a no-deal Brexit continue to weigh on economic sentiment in the EA and on the manufacturing sector. Growth for Germany for 2019 has been recently revised downward significantly to close to 0.5%. The EA inflation rate has also eased so far this year. Slow growth and persistent low inflation poses a challenge to the ECB’s policy normalisation.

DBRS does not anticipate any rate hikes in the EA until signs of higher inflation emerge. One more, the ECB has postponed its first hike in interest rates post-financial crisis, as in June, it extended its forward guidance for a second time this year. Moreover, the ECB hinted at the possibility of more monetary policy easing in case of adverse events. In DBRS’s view, the extension in the forward guidance and the new series of targeted longer-term refinancing operations (TLTRO-III) will ensure that monetary policy conditions remain accommodative. While this might not be enough to revive growth momentum in the near term, it should still be supportive, together with the current mildly expansionary fiscal stance in the EA.

In the UK, DBRS sees UK GDP growth slowing. The rolling three-month GDP trajectory is slowing after the uptick in Q1 2019. Manufacturing first surged and then fell, as orders were completed early and then annual plant shut downs were scheduled around the original March 29th Brexit day. The outlook for the next three months looks weak. The CBI composite growth indicators are pointing to weakness. DBRS takes the view that the underlying picture is that Brexit uncertainty in conjunction with a weak external environment will weigh on GDP growth.

DBRS expects monetary and fiscal response to economic challenges to remain appropriate. At its latest meeting in May 2019, the Bank of England kept Bank Rate at 0.75% and maintained the stock of corporate and government bond purchases. CPI inflation is currently close to its 2% target. Low inflation will support the Bank of England’s very gradual normalisation of monetary policy. DBRS agrees with the Bank that uncertainty around the UK outlook is higher than usual. Reflecting uncertainties, the Bank of England stated that the monetary response to Brexit could be in either direction. For now, loose monetary policy combined with a less restrictive fiscal policy going forward may prevent the economy slipping into technical recession, although the risk remains.

The Macro Update Europe also comments on the major macro headlines and presents a Macro Dashboard, for both the EA and the UK, with the latest main macroeconomic, financial and market indicators. The publication contains DBRS Rating Update on Sovereigns, Sub-sovereigns, and Supranational institutions in Europe, as well as the list of commentaries produced by both the Sovereign team and the Financial Institutions Group (FIG) team in Europe over the past three months.

For more information on “Macro Update – Europe: II – 2019 (June)”, visit www.dbrs.com or contact us at info@dbrs.com.