A Two-Speed Economy
We expect GDP growth to slow to 1.1% in 2019, and then grow by 1.3% in 2020 and 2021. Germany and Italy, the industrial hubs of the eurozone, will continue to suffer from the global manufacturing slowdown. So far, the domestic economy has remained resilient to the external slowdown and should continue to fuel growth. Tight labor markets, rising wages, and low inflation will support consumer spending. Investment is set to decelerate, but will still find support in high capacity utilization and low borrowing costs. Given the downside risks to growth, the ECB will wait until at least the second quarter of 2021 to raise rates, keeping the euro weak.
Risks to growth are tilted to the downside. An escalation of trade disputes, which could mean higher tariffs on EU cars, and a hard Brexit would all weigh on growth. On the positive side, the ECB's...