What does 2020 hold for Europe?
12/23/19
European Economic Outlook 2020
What does the future hold for Europe? We try to answer that question in our European Economic Outlook 2020. At a time when stagnation seems ever more likely in developed economies, a focus on economic growth and other key macroeconomic metrics persists, albeit with much more nuanced views on what these metrics should capture. This rethink of key macroeconomic metrics – such as gross domestic product and inflation – follows from the acknowledgement that we now live in a different or new economy.
Longer-term considerations for the new economy
With aging resulting in a constantly decreasing supply of labour and a higher old-age dependency ratio, the answer seems to lie in investing in productive capabilities and in untapping the potential of technological innovation. Investment in fixed capital, R&D spending, and the containment of waste and pollution externalities are key.
Fiscal policy will be at a crossroads, with governments deciding whether to increase their debt levels to stimulate productivity or improve wellbeing by means of focussed investments, or whether to err on the side of caution and maintain some fiscal leeway for when the economic situation worsens. Monetary policy is expected to remain loose and expansionary in pursuit of its inflation target at a time when the target itself is being questioned in an environment of slower growth, digitalization, and lower prices.
Subdued growth in 2020
Year 2020 is expected to be one of subdued growth, with global trade uncertainty and protectionism as well as a decline in manufacturing as the main culprits. It will be characterized by looser – if not greener – monetary policy, prudent fiscal spending, fiscal deleveraging aided by low debt service costs, and heightened leverage in the non-financial private sector. The strong labour market is expected to be an ameliorating factor in 2020, while the high indebtedness of the non-financial private sector is expected to accentuate any vulnerabilities.
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