(04 FEBRUARY 2019)DAILY MARKET BRIEF 1:EU: weak growth, accelerating inflation

The Eurozone is walking a tightrope. Q4 2018 data suggests the European economy is growing slowly amid softer Chinese demand, Sino-American discord and a Brexit stalemate. After a 2018 yearly GDP gain of 1.20%, a 5-year low, inflation appears to have picked up. The contribution of higher wages is finally taking effect. The recent rise in January core inflation rate to 1.10% (prior: 1%), attributable to services, as well as the continued drop in unemployment rate (+ 7.90% as of December 2018) should support the European economy.

Although the European Central Bank forecasts core GDP and inflation to reach 1.50% and 1.60% respectively in 2019, we think these might be revised at the next monetary policy committee in March 2019. We do not expect the ECB to change its stance on stimuli, as risk of a recession in the EU is very low. A stabilization in the EU economy is feasible if current issues, including a US–China trade truce and a soft Brexit, are realised. The upbeat US employment numbers from last Friday should support the greenback against the EUR short-term.