The mystery of the economic slowdown in the euro area.

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With the global economy entering 2018, it is clearly in a period of strong and synchronous growth. All major geographical groups have escaped the limit of continuous growth since 2010. Although this may still be the case, the economic activity in the euro zone has suddenly experienced a sharp decline, and this optimism has been affected. The euro zone has always been a leader in global expansion.
This began in February this year and has now become an event of importance that warrants further investigation. It is not entirely clear why a large part of the economic growth in the global economy has suffered such a great setback.
Last year, the forecast of economic forecasters in the euro zone was exactly the opposite. After a long period of time, the European Central Bank failed to relax its monetary policy at the lower and lower limits of interest rates. Unconventional monetary easing finally received support in 2017. Combined with the expansion of global trade, the end of fiscal tightening in the European Union and the rise in business confidence have led to an increase in spending on capital equipment, housing, and consumer durables, which has contributed to the sudden recovery of the European economy.
According to the prediction of Fulcrum’s economic activities, the economic growth rate of the euro zone was very fast at the beginning of last year, but by the end of 2017, the euro zone is still growing at a rate of 3.5%. The major economies in the Eurozone performed well: Germany 4%, France 3%, Italy 2%, Spain 3.5%. Both economic forecasters and the central bank believe that the strong recovery phase will continue until 2018. But so far, this situation has not yet occurred.
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The latest data released by the Eurozone show that the growth rate of economic activity in early April has dropped to 1.2%, and the growth of each major economy has dropped significantly. Even Germany, which is relatively unaffected by the economic downturn in Europe, has experienced a sharp decline. The current growth rate is only about 1%.
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For the forecasters of the European Central Bank, this slowdown is undoubtedly an accident. They expect that the economic growth rate will slow slightly in 2018. The latest ECB economic bulletin shows that in March the annual GDP growth rate was about 2.5% in the first and second quarters of 2018, and the minutes of the March Council expressed a high degree of confidence that the resulting rising power in 2017 will be Long time. They believe that the risks surrounding their optimistic growth expectations are balanced, although they do express fears that they may have a negative impact on global trade conflicts.

Why is there such a negative effect? ​​The fact is that the growth of economic activity in the United States and China did not show the same degree of slowdown as the euro area, indicating that the global economic expansion may remain largely unchanged. Nor has any significant slowdown in export orders or market sentiment, which may indicate that the strengthening of the euro is the main reason for the economic slowdown.
Some observers believe that bad news comes from temporary special factors such as extreme weather and flu outbreaks. Others believe that the results of the joint government talks held in Germany have weakened business confidence.
But I don’t see any really strong evidence to support these ideas. The breadth of the European economic slowdown, and the fact that both survey data and economic data have fallen, suggests that more important things may happen. Ben Breitholz of Bianco Research provided us with the following picture:
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So far, there is no convincing basic argument that can explain the economic slowdown in the euro zone. But there are two possible candidates.
The first problem is that the impact of the late quantitative easing policy implemented by the European Central Bank in January 2015 has begun to subside. Although this policy change did not involve a substantial drop in the actual policy interest rate, it did succeed in reducing the bank loan interest rates and bond yields across the euro area and restored the supply of bank credit in troubled economies. It is conceivable that this driving force has exceeded its maximum impact on the economic growth rate in 2017. Fulcrum economists estimate that in the middle of 2017, the economic growth in the euro zone will increase by about 1 percentage point, and this situation has now completely disappeared. In addition, as the market expects the European Central Bank (ECB) to normalize monetary policy in the future, the forward interest rate in the euro area began to rise last year.
Another possible explanation is that the growth rate in 2017 far exceeds the speed of long-term growth, so this situation will continue indefinitely. Supply restrictions may have begun to show. The Fulcrum nowcast model once predicted to gradually return to trend by 2018, and now they seem to interpret the data as more obvious than the previous expected trend.
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in conclusion
There may be some facts in the weather-related assumptions. Under this assumption, there may be some improvement in the coming months. But if two more basic explanations—the weakening of monetary policy effects or supply constraints—have proved to be correct, then the growth rate of the euro zone will make the market and the European Central Bank’s predictions this year fail. After a long period of continuous upgrades, we have seen consistent growth forecasts that are stabilizing.
The European Central Bank may have doubts about the economy at its next board meeting on April 26. It has been very confident that this year will continue its strong upward trend and will not be willing to change their assessment based on a few months of data.
The European Central Bank is clearly planning to end its asset purchase program by the end of 2018, but the combination of slowing growth and stable inflation may make it increasingly difficult to achieve this goal.

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