While the latest data suggest that the European economies made a weak start to the year, we do not see this as the start of a serious slowdown. The euro-zone in particular has more spare capacity than official estimates suggest and we think that stronger investment will support continued healthy growth. UK household spending will re-accelerate as the sterling-related squeeze on real incomes comes to an end, while Swiss exporters will benefit from the recent depreciation of the franc. In most countries, inflation looks set to remain very weak and we see both the European Central Bank (ECB) and Swiss National Bank raising interest rates later than markets currently assume. But we suspect that the ECB’s hawkish tendencies will resurface in 2020. Inflationary pressures are likely to build sooner in the UK and Sweden, implying a relatively steep upward path for interest rates and an associated appreciation of their currencies.
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