Economic growth has slowed to a crawl and is likely to remain anaemic until well into next year, even in the absence of a fresh external shock. Germany is probably in a recession already and we think it will not recover for a long while yet; Italy’s economy is set to flatline; and France will lose momentum as the region slows. German policymakers are unlikely to respond to mounting calls for a fiscal stimulus unless the unemployment rate there rises sharply. Meanwhile, although core euro-zone inflation is stuck close to 1%, an increasingly divided ECB will bide its time before making any further policy moves. That said, we think it will cut its deposit rate to -0.8% and further increase its corporate bond purchases next year.
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