Deloitte Insights delivers proprietary research designed to help organizations turn their aspirations into action.

DELOITTE INSIGHTS

  • Home
  • Spotlight
    • Weekly Global Economic Outlook
    • Top 10 Reading Guide
    • Fostering Well-Being
    • Cyber Risk
    • Resilience
  • Topics
    • Strategy
    • Economy & Society
    • Operations
    • Workforce
    • Technology
  • Industries
    • Consumer
    • Energy, Resources, & Industrials
    • Financial Services
    • Government & Public Services
    • Life Sciences & Health Care
    • Technology, Media & Telecom
  • More from Deloitte Insights
    • About
    • Deloitte Insights Magazine
    • Press Room Podcasts
Deloitte.com
Deloitte Insights logo
  • SPOTLIGHT
    • Weekly Global Economic Outlook
    • Top 10 Reading Guide
    • Fostering Well-Being
    • Cyber Risk
    • Resilience
  • TOPICS
    • Strategy
    • Economy & Society
    • Operations
    • Workforce
    • Technology
  • INDUSTRIES
    • Consumer
    • Energy, Resources, & Industrials
    • Financial Services
    • Government & Public Services
    • Life Sciences & Health Care
    • Technology, Media & Telecom
  • MORE FROM DELOITTE INSIGHTS
    • About
    • Deloitte Insights Magazine
    • Press Room Podcasts
  • Welcome!

    For personalized content and settings, go to your My Deloitte Dashboard

    Latest Insights

    In a competitive labor market for retail workers, sustainability programs could give employers an edge

    Article
     • 
    5-min read

    A framework for managing an extended and connected workforce

    Article
     • 
    2-min read

    Recommendations

    Government Trends 2023

    Article

    Navigating toward a new normal: 2023 Deloitte corporate travel study

    Article
     • 
    17-min read

    About Deloitte Insights

    About Deloitte Insights

    Deloitte Insights Magazine, Issue 31

    Magazine

    Press Room Podcasts

    Podcasts

    Topics for you

    • Business Strategy & Growth
    • Leadership
    • Operations
    • Marketing & Sales
    • Diversity, Equity, & Inclusion
    • Emerging Technologies
    • Economy

    Watch & Listen

    Dbriefs

    Stay informed on the issues impacting your business with Deloitte's live webcast series. Gain valuable insights and practical knowledge from our specialists while earning CPE credits.

    Deloitte Insights Podcasts

    Join host Tanya Ott as she interviews influential voices discussing the business trends and challenges that matter most to your business today. 

    Subscribe

    Deloitte Insights Newsletters

    Looking to stay on top of the latest news and trends? With MyDeloitte you'll never miss out on the information you need to lead. Simply link your email or social profile and select the newsletters and alerts that matter most to you.

Welcome back

Still not a member? Join My Deloitte

Eurozone

by Dr. Alexander Boersch
  • Save for later
  • Download
  • Share
    • Share on Facebook
    • Share on Twitter
    • Share on Linkedin
    • Share by email
6 minute read 16 May 2019

Eurozone Slower growth dynamics and the emergence of a two-tier economy

6 minute read 17 May 2019
  • Dr. Alexander Boersch Germany
  • Save for later
  • Download
  • Share
    • Share on Facebook
    • Share on Twitter
    • Share on Linkedin
    • Share by email
  • Economic situation: Beyond the peak
  • Economic sentiment: Domestic versus export sectors
  • Recession or downturn?
  • The next chapter of Brexit

Behind the scenes of a slowing eurozone economy, two diverging forces become apparent. While domestic demand and services sectors are well supported by thriving labor markets, industrial sectors—usually the engine of the eurozone economy—suffer from external headwinds.

Growth dynamics in the eurozone have receded substantially in the last few quarters, indicating that the region has likely passed the peak of the current recovery. This could mainly be due to a weakness in the industrial sector, which suffers from external headwinds. Nonetheless, the services sector and domestic demand are the key drivers of growth.

Learn more

Explore the Economics collection

Subscribe to receive related content

 

 

Economic situation: Beyond the peak

The eurozone economy has been in an economic downturn since mid-2018 (figure 1), following the boom phase of the recovery that began in 2016. In line with this shift, most forecasters have lowered the projected growth rates for the eurozone. The European Central Bank now expects a growth rate of 1.1 percent for 2019,1 while the estimate of the European Commission is slightly higher at 1.2 percent.2

The ifo business cycle clock: The euro area has entered the downswing phase (ifo Economic Climate for the euro area, balances)

Among the big eurozone economies, Spain continues to be in the lead. It grew 0.6 percent in the last quarter of 2018. Growth in France was lower, but still positive, while it stagnated in Germany and contracted in Italy. Italy is technically considered in a recession following contractions in two consecutive quarters.3 Recent preliminary flash estimates point to a stabilization of growth rates for the eurozone in the first quarter of 2019 (figure 2).4

Weak growth trend in the second half of 2018 expected to stabilize in the first quarter of 2019 (real GDP growth, quarter-on-quarter in percentage)

Interestingly, the overall weakness of the eurozone is mainly driven by the industrial sectors—the very sectors that normally power economic growth in Europe. Industrial production has been on a downward trend since 2018, especially in chemical and automotive sectors.5 There are numerous reasons for it—rising protectionism as well as declining growth rates in the United States and China have likely increased trade uncertainty and negatively impacted external demand. Additionally, industry-specific challenges in the automotive sector, especially the disruption of automobile production in Germany due to new emission standards for diesel-powered vehicles, added to the overall weakening of the eurozone economy.6

Economic sentiment: Domestic versus export sectors

The current economic sentiment presents the emergence of a two-tier economy amidst declining overall sentiment. In aggregate terms, the flash estimate of the Purchasing Managers’ Index (PMI) lost momentum again in April, dropping to 51.3 from 51.6 in March (with 50 being the threshold between expansion and contraction). Therefore, overall economic sentiment remains in positive territory, although it is getting closer to the threshold.

A closer look at the headline figures reveals very pronounced differences between the export-oriented industrial and the domestic services sectors. While the industrial sector is flirting with a recession, the services sectors show a high degree of resilience, thanks to robust domestic demand (figure 3).

Diverging trends for manufacturing and services

The manufacturing PMI currently stands at 47.8, clearly in negative terrain after it experienced the steepest downturn in six years in March. In Germany, it fell even further to 44.5. There is positive news too—the services sector shows much greater resilience, standing at 52.5. Thus, a robust services sector in the eurozone offsets the weakness of the struggling manufacturing sector. 7

Recession or downturn?

The big question therefore is whether the negative trend in the industrial sectors will spill over to the domestic economy. And if it does, whether eurozone’s domestic economy is resilient enough to withstand these pressures. Labor market conditions suggest that at least in the short term, the domestic economy will likely continue to thrive. Eurozone’s labor market is in a good shape—employment is at a record high, companies in countries such as Germany are struggling to fill vacancies, and wages are rising. 8 Hence, it is likely that domestic demand will develop favorably.

Moreover, the findings of the latest Deloitte’s survey for chief financial officers (CFOs) reveal that only a third of the CFOs in the eurozone are expecting a recession in the next year. At the same time, many expect receding growth rates in the eurozone and in other parts of the world, implying that slower—albeit positive—growth is a likely scenario.9 In a way, eurozone is moving closer to its potential growth rate that stands at around 1.2 percent.10

The next chapter of Brexit

A hard Brexit remains one of the biggest and incalculable external risks for the eurozone economy due to the strong and intensive economic relationships between the European Union (EU) and its third-largest trading partner. However, the immediate threat of a hard Brexit has disappeared for the moment, with the EU agreeing to postpone the Brexit deadline to late October.11

The EU accepted the proposal of the British government to postpone the deadline again (from mid-April) to prevent a no-deal Brexit after the UK parliament failed to accept the withdrawal agreement three times. The new deadline comes in the form of a so-called “flextension.” If the British parliament accepts the withdrawal agreement prior to the deadline, Brexit can take place before the end of October—provided that the United Kingdom participates in the European parliamentary elections on May 23, for which preparations are underway (in the unlikely event that the United Kingdom fails to participate, it would exit on June 1). If the British parliament agrees to a withdrawal agreement, then the transition period, currently scheduled until the end of 2020, will kick in. During this period, the EU and the United Kingdom will negotiate the substance of their new economic and political relationship.

From a European perspective, the key risks of Brexit are clear. A recent Deloitte survey of 262 German corporates shows that companies most fear higher complexity and costs due to different regulations in the future (figure 4). The second-biggest concern is reduced export opportunities, again due to regulatory differences, but also due to possible tariffs. Nonetheless, corporates also see some opportunities in the form of new business potential through relocations to Germany or other parts of Europe as well as less through competition in the European or German markets.12

The effects of Brexit on eurozone corporates are only one example of external economic headwinds, alongside tensions in the global trading system and slower growth in Asia and China. These external headwinds indicate that exports are unlikely to drive growth in eurozone in the near future. Quite unusual for the export-oriented eurozone, its economic performance will mainly hinge on its domestic economy and domestic demand.

Authors

Alexander Börsch is the chief economist and head of research at Deloitte Germany.

Acknowledgments

Cover image by: Tushar Barman

Endnotes
    1. European Central Bank, “Macroeconomic projections for the euro area,” March 7, 2019. View in article

    2. European Commission, European economic forecast, winter 2019, February 7, 2019. View in article

    3. Eurostat, “GDP main aggregates and employment estimates for fourth quarter 2018,” news release, March 7, 2019. View in article

    4. Eurostat, “GDP up by 0.4% in the euro area and by 0.5% in the EU28,” April 30, 2019. View in article

    5. Eurostat, “Industrial production down by 0.2% in euro area, unchanged in EU28,” April 12, 2019. View in article

    6. International Monetary Fund, “World Economic Outlook update,” January 2019. View in article

    7. IHS Markit, “IHS Markit Eurozone Composite PMI,” April 3, 2019. View in article

    8. Eurostat, “Euro area unemployment at 7.8%,” April 1, 2019. View in article

    9. Michela Coppola, European CFO survey: Eyes on demand, Deloitte, 2019. View in article

    10. Potential growth rate 2018–2027 as projected by Oxford Economics, “Country economic forecast: Eurozone,” April 10, 2019. View in article

    11. European Council, “European Council decision taken in agreement with the United Kingdom, extending the period under Article 50 TEU,” press release, April 10, 2019. View in article

    12. Deloitte Brexit Briefing 10, “Risks, expectations and strategies as stated by German companies,” March 2019. View in article

       

Show moreShow less

Topics in this article

Economics , Eurozone , Europe Middle East Africa (EMEA) Economics , Europe Middle East Africa (EMEA)

Deloitte Global Economist Network

The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

Learn more
Get in touch
Contact
  • Alexander Börsch
  • Director
  • Deloitte & Touche GmbH
  • aboersch@deloitte.de
  • +49 (0) 89290368689

Download Subscribe

Related content

img Trending

Interactive 3 days ago

More from the Economics collection

  • Will they, or won’t they return? Addressing the postpandemic labor force deficit Article2 years ago
  • Rising corporate debt: Should we worry? Article4 years ago
  • All in a day’s work—and sleep and play: How Americans spend their 24 hours Article5 years ago
  • How the financial crisis reshaped the world’s workforce Article4 years ago
  • A forecast of housing construction in the United States Article4 years ago
  • Millennials: The overqualified workforce Article4 years ago
Dr. Alexander Boersch

Dr. Alexander Boersch

Director | Deloitte & Touche GmbH

Alexander is the chief economist and head of research for Deloitte Germany. His expertise lies in the analysis of economic trends and their impact on companies and the business environment. He is the author of numerous publications on German and European economics, Brexit, trends in the digital economy and globalisation. Prior to joining Deloitte, Alexander was Senior Economist at Allianz Global Investors.

  • aboersch@deloitte.de
  • +49 (0) 89290368689

Share article highlights

See something interesting? Simply select text and choose how to share it:

Email a customized link that shows your highlighted text.
Copy a customized link that shows your highlighted text.
Copy your highlighted text.

Eurozone has been saved

Eurozone has been removed

An Article Titled Eurozone already exists in Saved items

 
Forgot password

To stay logged in, change your functional cookie settings.

OR

Social login not available on Microsoft Edge browser at this time.

Connect Accounts

Connect your social accounts

This is the first time you have logged in with a social network.

You have previously logged in with a different account. To link your accounts, please re-authenticate.

Log in with an existing social network:

To connect with your existing account, please enter your password:

OR

Log in with an existing site account:

To connect with your existing account, please enter your password:

Forgot password

Subscribe

to receive more business insights, analysis, and perspectives from Deloitte Insights
✓ Link copied to clipboard

Deloitte Insights delivers proprietary research designed to help organizations turn their aspirations into action.

Deloitte Insights

  • Home
  • Topics
  • Industries
  • About Deloitte Insights

Spotlight

  • Weekly Global Economic Outlook
  • Top 10 Reading Guide
  • Fostering Well-Being
  • Cyber Risk
  • Resilience
Deloitte logo

Learn about Deloitte’s offerings, people, and culture as a global provider of audit, assurance, consulting, financial advisory, risk advisory, tax, and related services.

  • Privacy
  • Terms of Use
  • Cookies
  • Avature Privacy