The Daily Update - ECB/BoE Forecasts

Yesterday both the ECB and the Bank of England slashed their growth forecast for this year, blaming a plethora of ongoing concerns, from trade frictions and a slowdown in China to political instability and the ‘fog of Brexit’. The ECB now believes that the EU economy will grow by just 1.3% the year, down from the 1.9% it forecast only 3 months ago, whilst the BoE believes the UK will fair slightly worse at 1.2% growth, down from the 1.7% predicted in November. This would be the weakest growth since 2009. Earlier in the day, Spain had already reported that its industrial production had declined a massive 6.2% YoY. This morning Italy’s industrial production came in at -5.5% YoY.

The Bank of England governor, Mark Carney, gave a mixed news conference after the forecast. He believes ‘that the fundamentals of the UK economy are sound. The financial sector is resilient. Corporate balance sheets are strong, and the labour market is tight’ but gave warning that ‘the fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business’. He went on to say that 50% of firms in the UK were nowhere near ready for a no-deal Brexit, whilst the other 50% thinks they have done all they can to prepare. Worryingly, Carney warns that the positive rebalancing of the UK’s economy away from consumption has paused, believing that business investment shortfall since the Brexit vote is an ‘absolute outlier’ by international standards.

Over in Brussels the European Commission also sharply cut its outlook with Italy’s downward revision being the starkest. The commission now believes the southern European country will grow at just 0.2% this year, down from the previous forecast of 1.2%. In its statement, the commission said ‘Much of the euro area's loss of growth momentum can be attributed to fading support from the external environment, including slower global trade growth and high uncertainty regarding trade policies’ adding ‘However, there have also been a number of domestic factors at play’. With a number of those factors still in play, Brexit, US/China and now the spat between France and Italy, those clouds on the horizon are getting darker.

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