GDP growth in the euro-zone is likely to be only slightly stronger this year than in the second half of 2018. Hopes for a sharp rebound in export demand will probably be disappointed, meaning that the manufacturing sector will not turn the corner for a while yet. Meanwhile, real household incomes are set to increase only slowly as employment growth and wage inflation decline, and households step up their saving rate further. Against this backdrop, business investment is also likely to be subdued. Lacklustre GDP growth means there is little prospect of core inflation picking up from the close-to-1% level it has been stuck at for five years – even if, as we expect, the ECB further strengthens its forward guidance and offers very cheap long-term loans later this year. By the middle of next year we think the ECB will re-start its asset purchase programme.
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