In this episode, Jake Siewert sits down with Jari Stehn of Goldman Sachs Research to discuss his team’s outlook for Europe’s economy in 2020. “We think 2020 is going to be a better year for Europe than 2019,” Stehn says. “We expect growth to be 1.1% next year, which is a bit above consensus, and is certainly notably above where the current numbers are running.” Stehn goes on to explain the drivers behind this growth pick-up as well as key risks that could derail estimates.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exe, into the Goldman Sachs, will discuss developments currently shaping markets industries in the global economy. I'm Jake Seward Global, had of corporate communication to the firm. This episode is all about. What's ahead for Europe's economy, in twenty twenty were joined by you, steam head of european Economics for Goldman Sachs Research yard His team recently published there twenty twenty outlook so we'll talk through their forecasts and the drivers behind them. You are welcome to the programme. Grey Thanks having we saw in this time of year, you publish year twenty twenty outlook this year was called through. The trough sense optimistic Christine guards taken over the presidency of the the European Central Bank. What awaits her?
more and more generally day european area economy terms of growth next year. But we think twenty twenty is going to be a better year for Europe than twenty nineteen. So we expect growth to be one point: one percent next year, which is a bit above consensus and suddenly, notably above where the current numbers are running. The reasons for the pick up, ah, that the world environment looks a bit more friendly. The global economy looks like it regaining a bit of momentum. We think in number six have diminished around the world. Regarding the trade war regarding breaks it and also domestically, we think that some resilience, particularly in consumption, so wage growth, has been fairly resilient. Fiscal policy is providing a bit more of a boost. We think and twenty twenty one and twenty nineteen and you
so seeing some of the high frequency data points starting to pick up something so far, that's focused mainly on the more forward. Looking indicators was there if you like, the spot data has remained weak, but it does give us some confidence that we are moving as he said through the trophy now. At the same time, I think it's important to keep in mind that there are a bunch of issues that are going to keep the turn around and growth a bit more gradual, then what we saw in two thousand seventeen, so the starting point is a lot weaker. The industrial sector is still in recession, so we think that will take a bit of time to turn round. We ve also seen some collateral damage from the weakness in the industrial sector to, for example, german employment growth has slowed quite a lot and again that could act as a bit of a brake on the speed of a turnaround.
Then nothing on some of these risks that are mentioned. We have seen progress, but we haven't seen resolution on those who are so we take that together we are expecting a pick up and growth, but we think it will be relatively gradual. So we have growth, closed, a trend in the first half of twenty twenty and then will clearly above trend in the second half. So it's a bit of a back loaded story, but Certainly, a more optimistic one that for two thousand ninety, so what about inflation and unemployment rates are low in Europe, but Whitworth has moved up a bit in the last few years. The core inflation is just stock at one percent, little below it, policy makers have liked to see. What's the Denham, Then what's ahead. That's all, Inflation has basically been stuck at around percent for a couple of years now, and we expect that to me in the case of the next year before inflation and drift up slowly afterwards, and we think that because inflation is subject to
of cross kinds. So, on the one hand, as you say that, in quite a lot of labour market improvement, so the unemployment rate is back to two thousand eight levels. Wage growth has picked up quite nicely. Your area, but at the same time, firms very reluctant to pass on that increase in labour costs and inflation expectations which ultimately anger where inflation is headed have been drifting down in Europe, particularly when you look at survey measures of inflation expectations, and so when we take that together. We think in the near term, there's little upward pressure on inflation, but over a longer period of time, we then think inflation should drift higher slowly. So we have inflation currently around. One percent think it will stay here for a while and then drift up very gradually years after that so yard to the lay person. This debate among
Central bankers around one percent inflation, two percent inflation may seem somewhat obscure, like what's the significance of trying to push inflation up a little bit higher within Europe. The I think it really is about anchoring inflation expectations at the easy bees target, and I think that matters a lot, because that will ultimately determine where inflation ends up over the longer term and the closer. Inflation is two zero, the higher the risk of deflation, and so we know from the experience in Japan that deflation can be very dangerous for economies, because, basically, consumers expect prices to fall. They
of purchases and you can get a lot of economic weakness as a result of that. So I think it's really about that downward drift in inflation expectations that we ve seen in Europe and the importance to push against that and make sure that inflation expectations stabilize closer to two percent, and that's where I think a more symmetric and clear at two percent inflation target would be helpful because it would really signal that policy makers take that target seriously and would provide more of an anchor for households in terms of their expectations where inflation said it and keep you further away from that risk of falling into a deflationary cycle. That's exactly- and I think your Japan is
the key experience here to keep in mind, because once you hit that deflationary trap, it's quite hard to then get out of. It said the dynamics you're describing relatively lower unemployment relatively stable, but low inflation Sound pretty benign at some level, but how for those Euro specific dynamics, and how much is that a global phenomenon? The I think that differs a bit between growth and inflation, though I think the expected growth pick up has an important global component, because Europe, of course, is a very open economy, is quite exposed to the global trade cycle, and so the improvements that we expect in world growth should lift
european growth. So I think that has an important global component, whereas I think on the inflation side, I think the issues are a bit more Euro area specific, because if you look at the U S, if you look at the UK, inflation is around two percent significantly higher than the one pissed and we are seeing in the Euro area, and I think that has to do importantly with a starting point. After the Red enterprises across the Euro area than ran into the debt crisis in Europe and everything took longer to rebound, and we still think there's some slack in Europe and as we said earlier, inflation expectations have been drifting down and I think that is different to many other advanced economies around the world. He's going to take the Euro area some time to catch up until inflation gets close to two percent.
So obviously we love to talk about Europe as a whole, but it's a much more complex picture when you're sitting there what countries are above, consents what kind You don't look better more countries are below consensus were the over achievers as it were as you look ahead to twenty twenty. I think, there's an interesting split. So we are about consensus for Germany, for France and for the UK, but interestingly, for slightly different reasons, So the german story is basically a global story and industrial story, because the german economy is highly exposed to the global cycling. As we said earlier, we think that we'll get a bit better in twenty twenty, whereas France is much more about domestic sources of growth. France didn't decelerated as sharply as Germany did, and household spending, for example, held a pretty well in France
and we expect that to be the case. Also in twenty twenty saw, in particular some of the labour market reforms that have been undertaken over the last few years. We see some scope that those supporting the labour market and in turn will generate income for households to spend. So the reason we are above consensus for France is much more domestic story rather than a foreign one, now play city in Spain with basically in line with consensus. I think in ITALY that should be some boost from the improvement in the global cycle improvement in german manufacturing, because it is deep, is quite closely linked to, me, particularly via the north of ITALY. But at the same time, ITALY still faces a number of important challenges that we think on the political side. Even though things have been more stable, there is a risk of new elections in twenty twenty
and you're still seeing a number of structural challenges that ITALY has that quite familiar. Of course, high debt low potential growth, but we think that mix is going to keep a bit of a campaign on growth. Were Spain, of course, did very well for much of the last couple of years growth there held up, better than in Germany, but in Spain we ve also recently seen deceleration in growth, and we have seen some political fragmentation. So there was a repeat election in November, which led to yet another on parliament, and so we think some of that political uncertainty will also act as a bit of a dampener in Spain into next year. So you kind of seeing a bit of split here between the core countries where we are somewhat above consensus
and then countries on the periphery wherewith closer to consensus. Now, let's talk about the UK for a moment, you see a pretty compelling case fer a bit of a bounced bang in the EU can above trend growth there. What is making more optimistic about the british economy yet really two things. The first is that we think bricks. It resolution is quite likely in twenty twenty, so if the poles are right and the conservative party will form the next government, then we think that's a good chance that the withdrawal agreement
will pass relatively quickly before the end of January, and we have found in our work that the uncertainty around breaks. It has been an important drag on UK growth over the last couple of years, mainly via investment firms have been reluctant to invest. So I think, if you get breakfast resolution along that dimension, then that should be quite supportive for growth in twenty twenty. The second is on the fiscal site, where both the conservatives and Labour party have put forward pretty sizeable spent plans one dozen election year as one does an election exactly, and we think those would provide pre significant boost to growth now
that might take a little bit longer to ramp up. So we think the fiscal boost wouldn't come until the second half of twenty twenty and then going to twenty one and twenty two. But I think that's another important, and so I think that mix is quite in testing that currently growth momentum in the UK is very weak, but we see it pretty compelling case for pick up there in the second half of twenty and then twenty one net raised our numbers for the UK. So let's talk about the European Central Bank is the big big change. And personalities from my druggie too. Now Christine Lagarde. What do you think? The challenges are ahead for the easy be under the guards leadership, so the big challenge, of course, is going to be to get inflation closer to the inflation aim. As you said earlier, inflation is stuck around one percent and they would,
like inflation to be closer to two percent now in the near term, we don't expect much action from the OECD and that's really because of the expected growth pick up. We talked about earlier, so even inflation is low and is below whether would like it to be as long as growth is expected to pick up. I think that takes away the urgency for them to act now. I think the risk in twenty twenty is still towards easing, and we would expect that if growth disappoints and growth doesn't pick up, then we would expect them to ease, and I think the most likely way for them to use is to cut the interest rate further. But, as I said, that's not the baseline, given the signs that we might see a bit of a pick up in growth. Instead, we think twenty twenty is going to be all about the strategy review that
president. Mugabe is likely to initiate soon and we think that review will end up with a clearer objective for the easy be with a symmetric two percent inflation target. Instead of the rather fuzzy formulation that they have at the moment where they say they want inflation to be below but close to two percent, and so we think they will clarify that go to two percent symmetric inflation target I think the main implication of that is going to be that it will underscore the need for them to remove in highly accommodative for quite some time. It will crystallize that one percent inflation is significantly below that two percent target, and so we think they will keep the key. We purchase programme the twenty billion per month. We think they will keep that running for a couple of years until the end of twenty twenty one and we think that will be quite patient with raising interest rates
we don't have a rate higher or the way until the end of twenty twenty two. So you are, there has been a lot of criticism of the European Central Bank policy in the negative interest rates are cycle there and what is the response of the easy? Be those who say that rates of just got into law and really have no room to go lower. Either. Response has been that on net negative interest rates have been effective, so easy. Be officials have argued that the negative rates have been passed on by banks into retail ending rates and that you are even starting to see some of those retail deposit raids go negative and that this is welcome because it aids the transmission mechanism
monetary policy. At the same time, there is an acknowledgement, of course, that negative interest rates and very low rates come with costs, in particular that they weigh on bank profitability which ultimately might under cut that transmission mechanism, that I just about. So the view is that there is a as we say, low abound, on interest rates in Europe, but most easy be officials have argued that we are not yet at that law abound in that their still is room for them to cut interest rates if they need to, and we agree with that assessment. So our own estimates point A low abound at around minus one percent, which would still get the easy be a little bit of whom to cut not an awful lot, but fifty basis points of cuts. Before you hit the point where negative interest rate
come counterproductive. So I see, there's not a lot of mean, there's some room and not a lot of room on interest rate policy. Given the last decade of low interest rates. Well. That was room for maneuvering on the monetary side there's. Obviously some potential for fiscal policy in this is what's been a big debate in Europe. How much some of the healthier bigger economies can stimulate? Think I'm in the physical side? What's your outlook, they are for fiscal policy. We talked about it in the case. UK but habit for the continent, the continent. We think it's going to be more modest, so we have a more this tail wind from fiscal policy over the next couple of years, but not the big bang that some people have hopeful so, budget plans across the Euro area have turned more. Expansionary includes Germany, France or ITALY, and we think that is going to boost growth in twenty twenty by three tents. So you might say, that's not very
but I think, given that potential growth in Europe is only at about one to send, I think it's not insignificant as a growth source now beyond that. That is quite a bit of space for additional fiscal expansion in Germany, but we don't currently see the political support for that to be debated. So on our estimates. That's about two percent and a half of GDP available within the domestic fiscal rules and then about another one and a half percent evaded. Under the european fiscal, also really quite a lot to be used. But the political situation is such that we are sceptical that a lot of that will be used in addition over the next couple of years. So I think the
delete. A ship election over the weekend, which brought in a new leadership pair, raises the risk that we are going to get a little bit more fiscal, but we're not particularly hopeful that we're going to see a big turn round, the least not in twenty twenty. So we think that would require a further catalysts, either a lot more economic weakness, shop downturn or in election, but an election to us still see more to be a twenty twenty one event rather than a twenty twenty event. So you mention to the big overhangs on the european economy and the markets, their breaks it in the trade wars which mostly centre around the? U S in China to some extent, but increase
global. What's your take on how those issues might look in the next year, we expect progress on both of those risks over the next few months. So in the UK, the Poles for the election point to the conservative majority, and we think that if that turns out to be the case, we think that the withdrawal agreement would be passed pretty quickly. The withdrawal agreement, Prime Minister Johnson, negotiated with it you would be passed pretty quickly by the end of January. So that would be helpful in lifting some uncertainty- it's probably not going to all of the uncertainty straight away, because the UK, of course needs to negotiate a free trade agreement with the EU and is in the transition phase under current rules only until
end of twenty twenty, and so there is another if you like, Clifford coming up through those negotiations, but we think the hurdle for extending that This phase is a lot lower than the hurdle was for extending the article fifty deadline, and so we think that in the end there is going to be an extension that to create more time to negotiate a free trade agreement. Now on the global trade war, we also see some progress. Obviously there still quite a lot of uncertainty here, but our base case is that there will be a phase one agreement between the Eu S in China, with probably a partial roll back of some of the recent tariffs, and I think that would be helpful for global trade and, of course, you're being exposed to that trade that should be
but I think at least, as importantly, is the issue of auto tariffs, of course, for europe- and I think here the risk of auditors now seems pretty low, and I think that Sir positive for Europe and Germany in particular, because that uncertainty had been hanging in the background and, I think, had been an important source of some of the industrial weakness that we ve seen pity in Germany, so train and breaks it get alot of headlines. What are some of the other risks that are talked about a little less frequently for the region next year. I think it important to keep an eye on this. The italian political situation in twenty twenty nine,
More generally, the political situation in ITALY looks a lot more stable than it did last summer, when, of course, the government broke up and markets where positively surprised by the speed at which a new government was formed between the five STAR Party and the Democratic Party under Prime Minister counter now are based cases that that government will stay together in twenty twenty. But I think that is a risk around the regional elections in early twenty twenty that could be a change to the government that there could be no elections that could bring in a more Europe skeptical governments. I think that's an important risk to keep an eye on twenty twenty. So we like to talk about risks in common, but is there anything that could provide a catalyst to growth next year that will not, as focused on, I think them
in upside risks for the Euro area, is that if global growth get better, if the global industrial trade cycle turns that Europe turns more quickly than we anticipate, and that of course is particularly the case in Germany, which is, if you like, a high bitter economy? Relative to the global industrial cycle, as I said earlier, I think the baseline for us is that this turn round happens slowly, but you could see how this would happen more quickly. How you are starting from a very low base here and how those things would turn around more quickly. I think that's the main upside risks to be focused on, in, of course, that we would see in the industrial data- and I think, that's the key area for us to watch very closely over, next month. So URI thanks for joining us today and covering a pretty wide range of topics rang Europe. What are you person
can forge next year was a big year for our family, because we have a six month year, old daughter and next year is going to be began, showing us a number of fixed steps here. Looking forward to see her walk, see her talk and that's going to be exact all right. Well, you can join us next year and talk about that and give us an update on her problems. Good. Thank you so much for joining us today, thanks for having me right well. That concludes this episode of Exchanges- Goldman Sachs. Thanks for listening, and if your joy, the show we hope you subscribe and apple podcasting, leave a rating or comment in more from Goldman Sachs experts, as was influential policymakers, academics and investors on market moving topics be sure to check out our new podcast top of Minor Goldman Sachs, hosted by also Nathan Sing,
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Transcript generated on 2021-09-18.