The eurozone's GDP grew by a better than expected 0.4 per cent in the first quarter or, specifically, 1.2 per cent year-on-year.

Italy put in 0.2 per cent GDP growth, thereby ending the technical recession that started in the third quarter of 2018.

It is still premature to pencil in a recession in Europe but a significant growth acceleration should not be expected either.

The stronger than expected growth in the first quarter was possibly helped by a normalisation of certain factors that held back growth in the second half of last year. That said, the first indicators for the second quarter, namely the European Commission’s economic sentiment indicator and PMI, fell in April and hence cast some doubt that this growth pace can be maintained.

Growth will remain slow

That being said, it is not expected that growth will just suddenly disappear in the coming months; there is still sufficient underlying momentum. Unemployment fell more than expected to 7.7 per cent in March, supporting consumption. Also, it is unlikely that weakness in manufacturing will last. The pick-up in China and some of the emerging markets should support European exports, though it might last until the third quarter before this effect really shows in the figures.

Furthermore, the fact that German industrial production increased by a stronger than expected 0.5 per cent month-on-month in March, might already be a sign that industry is bottoming out. Growth of real narrow money, according to the ECB one of the best leading indicators of economic activity, clearly points to slow growth.

European elections will be important

On the political front, the European elections might also be important for domestic reasons.

In France, the outcome will be seen as a poll on how the citizens react to President Macron's reform proposals.

In addition to, it will most likely show a strengthening of government in Italy, which could ultimately entice Salvini to prompt elections later this year to consolidate his strength. That being said, Italy is likely to see some renewed uncertainty anyway, as the European Commission already indicated a deterioration of Italian public finances, demanding corrective measures in the 2020 budget.

What about the ECB?

The inflation spike in April, with headline inflation shooting to 1.7 per cent and core inflation to 1.2 per cent, should be taken as a one off since it could be subject to seasonality caused by the late holidays this year that pushed up package holiday and hotel prices. In May, this should normalise again.

It is agreed that the somewhat higher oil prices could push up inflation, but this impact is likely to remain muted. As for core inflation, it isn’t expected to top 1.5 per cent over the next two years, clearly undershooting the ECB's inflation target.

The ECB’s change of tone has driven speculation on new monetary initiatives. As such, the idea of a two-tiered deposit facility system was applauded by financial markets. However, the proposal doesn’t seem plausible to ECB board members since there is no economic reason to do it, as so far the negative interest rate doesn’t seem to impact lending in member states.

As for bond yields, only a minor upward potential seems plausible. While the faltering of net purchases could trigger upward pressure, the expectations of short rates remaining low for a very long time and lower US bond yields in 2020 are likely to dull this movement.

This article was issued by Maria Fenech, investment management support officer at Calamatta Cuschieri. For more information visit, The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.


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