Economic growth is likely to remain anaemic this year and to slow further in 2020 even if downside risks, such as a US auto tariff or no-deal Brexit, do not materialise. The downturn in the German manufacturing sector is spreading to other parts of the economy, and Italy appears to be sliding back into a mild recession. What’s more, although France has held up better this year, it will probably lose momentum in 2020 as its fiscal stimulus fades. The weakness of the euro-zone as a whole will prevent core inflation from picking up from the 1% level it has been stuck at for several years. We think this in turn will prompt the ECB to reduce its deposit rate and to re-launch quantitative easing before the end of the year. While this should keep a lid on bond yields, it will probably have little impact on GDP growth or inflation.
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