The drivers of the deceleration back then appeared, to some extent, to be idiosyncratic and short-lived, relating to the effect of emissions standards on the euro area car industry and a normalisation of world trade from its very strong growth rates in 2017.1 Yet it was clear that the loss of growth momentum could become more broad-based and persistent if two risks were to materialise: first, if external demand were to remain weak; and second, if this were to spill over into domestic demand. In the meantime, the first risk has by and large been realised. The weakness in world trade has continued, which has significantly affected the manufacturing sector. Global goods import growth2 in January reached its lowest level since the Great Recession, on the back of rising uncertainty about trade disputes and a slowdown in emerging market economies, especially China. As a result, growth in extra-euro area goods exports was negative at the end of last year for the first time since January 2016, and industrial production fell by 4.2% year on year in December – its largest decline since 2013 – before recovering somewhat in January. Indicators such as new export orders, which have historically been closely associated with industrial production3, remain in negative territory. So we are now seeing a more persistent deterioration of external demand. But a “soft patch” does not necessarily foreshadow a serious slump.
But for now expectations for investment remain relatively robust. Though professional forecasters have slightly downgraded their projections for investment growth this year – from around 3% to around 2.5% – the fundamentals are in place for investment to rebound, if global growth stabilises. Capacity utilisation stands close to its long-term maximum, financing conditions remain very favourable and corporate leverage5 (as a percentage of total assets) has fallen to levels last witnessed in the early years of EMU – although gross corporate indebtedness6 (as a percentage of gross value added) still stands above its pre-crisis level. The latest surveys also suggest some recovery in business sentiment. While consumption is typically less affected by external developments, its growth rate has slowed over the last year. Higher uncertainty may have played a role, as reflected in the rise in the household saving rate over the course of 2018. But the main drivers were idiosyncratic factors unrelated to the global economy, coupled with country-specific factors in France and Italy. The most important issue for the consumption outlook is the labour market, since higher employment has been the major driver of consumption during the current expansion. So far the labour market has been resilient to the growth slowdown.