ECB staff macroeconomic projections for the euro area. September 2019.
Date: 2019-09-09
Institutions: European Central Bank
Subjects: European Central Bank, European Monetary System, European System of Central Banks, central bank, economic forecasting, euro area, macroeconomics, monetary policy, multiannual financial framework, serial publication, single monetary policy

ECB staff macroeconomic 
projections for the euro 
area 

September 2019 

 
 
 
 
 
 
 
 
 
   
Contents   

Overview 

1 

Real economy 

Box 1 Technical assumptions about interest rates, exchange rates and 

commodity prices 

Box 2 The international environment 

Box 3 How resilient has euro area domestic demand been to external 

shocks? 

2 

3 

Prices and costs 

Fiscal outlook 

Box 4 Sensitivity analyses 

Box 5 Forecasts by other institutions 

2 

3 

6 

8 

11 

14 

16 

16 

17 

ECB staff macroeconomic projections for the euro area, September 2019 

1 

 
 
 
 
Overview 

Following weak growth in the second quarter of 2019, recent short-term indicators 
suggest that the recovery in the second half of the year that was envisaged in the 
previous projection exercise will be postponed. Economic sentiment indicators have 
continued to worsen over recent months, notably in the industry sector. This reflects 
the ongoing weakness in global trade in an environment of continued global 
uncertainties, such as increased protectionism, a potential sharper slowdown in China 
and a disorderly Brexit. These factors are weighing on business expectations in the 
manufacturing sector and are expected to continue to hamper euro area activity in the 
near term. At the same time, sentiment in the domestically oriented services and 
construction sectors, as well as consumer confidence, continues to exhibit more 
resilience, while the labour market situation has continued to improve. The baseline is 
conditioned on the technical assumption of notably lower interest rates reflecting 
market expectations, an assumption of an orderly Brexit and some fiscal easing – all of 
which should support a return to the medium-term growth path foreseen in the June 
2019 projections. In addition, having reached very low levels in 2019, foreign demand 
is expected to recover and to provide impetus to activity over the remainder of the 
projection horizon. Overall, real GDP growth is projected to be 1.1% in 2019, before 
gradually increasing to 1.4% in 2021. Compared with the June 2019 projections, the 
short-term outlook has deteriorated due to weaker confidence indicators and 
continued global uncertainties, leading to downward revisions in 2019 and in 2020, 
which in 2020 are mainly due to carry-over effects. Beyond the short term the impact 
of negative external shocks is broadly offset by the impact of more favourable 
financing conditions and lower oil prices. 

HICP inflation is expected to moderate this year and remain subdued next year, before 
recovering to reach 1.5% in 2021. HICP inflation excluding energy and food will rise 
slightly by the end of 2019 and move sideways in the course of 2020 before 
strengthening in 2021, supported by the expected pick-up in activity and the 
associated recovery in profit margins as past increases in labour costs feed into 
prices. Compared with the June 2019 projections, HICP inflation has been revised 
downwards, largely owing to the energy component which is revised notably 
downwards for both 2019 and 2020, due to lower oil prices. In addition, HICP inflation 
excluding energy and food is also revised downwards, reflecting weaker data outturns, 
weaker activity, indirect effects from lower energy prices and persistent past 
over-predictions.1   

1    The cut-off date for technical assumptions, such as for oil prices and exchange rates, was 19 August 

2019 (see Box 1). The cut-off date for including other information in this exercise was 29 August 2019. 
The current macroeconomic projection exercise covers the period 2019-21. Projections over such a long 
horizon are subject to very high uncertainty, and this should be borne in mind when interpreting them. 
See the article entitled “An assessment of Eurosystem staff macroeconomic projections” in the May 2013 
issue of the ECB’s Monthly Bulletin. See http://www.ecb.europa.eu/pub/projections/html/index.en.html 
for an accessible version of the data underlying selected tables and charts. 

ECB staff macroeconomic projections for the euro area, September 2019 

2 

 
 
                                                                    
1 

Real economy 

Real GDP growth in the euro area fell to 0.2% in the second quarter of 2019, as 
export growth slowed down sharply (see Chart 1). Growth in the second quarter 
came in as had been expected in the June 2019 projections. Despite decelerating 
slightly in the second quarter of 2019, domestic demand remained the main driver of 
growth, while the net trade contribution turned negative.   

Chart 1 
Euro area real GDP 

(quarter-on-quarter percentage changes, seasonally and working day-adjusted quarterly data) 

1.00

0.75

0.50

0.25

0.00

-0.25

-0.50

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: The ranges shown around the central projections are based on the differences between actual outcomes and previous projections 
carried out over a number of years. The width of the ranges is twice the average absolute value of these differences. The method used 
for calculating the ranges, involving a correction for exceptional events, is documented in “New procedure for constructing Eurosystem 
and ECB staff projection ranges”, ECB, December 2009, available on the ECB’s website. 

Short-term indicators point to weak growth in the second half of 2019. The 
Economic Sentiment Indicator compiled by the European Commission has continued 
to decline in recent months driven by sentiment in the manufacturing sector which has 
fallen further below its longer-term average level. This seems to reflect the ongoing 
weakness of global trade, as well as the impact of global uncertainty, in particular 
related to global trade disputes, a possible no-deal Brexit and risks of a sharper 
slowdown in China. In contrast, sentiment in the more domestically oriented services 
and construction sectors, as well as consumer confidence, has continued to exhibit 
more resilience, despite some declines in August. The latest developments in the 
Purchasing Managers’ Indices confirm this divergence across sectors. Overall, the 
latest indicators suggest that the weak growth seen in the second quarter will continue 
in the second half of 2019, driven by a negative contribution from net trade, while 
domestic demand is expected to remain relatively resilient.   

Over the medium term the baseline assumes a gradual dissipation of global 
headwinds, allowing fundamental factors supporting the euro area expansion 
to regain traction (see Table 1). In particular, the baseline assumes an orderly exit of 
the United Kingdom from the EU and no further protectionist measures (beyond those 
already announced), which also reduces the chances of a sharp slowdown in China. 

ECB staff macroeconomic projections for the euro area, September 2019 

3 

 
 
 
Thus, the current level of uncertainty will gradually decline, allowing the fundamentals 
supporting growth to regain traction. The ECB’s monetary policy stance is expected to 
remain very accommodative and to continue to be transmitted to the economy. More 
specifically, the technical assumptions imply that at the end of the projection horizon 
nominal interest rates would still stand below the very low levels they reached in 
mid-2019. Lending to the non-financial private sector should also strengthen modestly 
towards the end of the projection horizon, spurred by the improving macroeconomic 
environment, very low interest rates and favourable bank lending conditions for both 
households and non-financial corporations. Lower deleveraging needs across sectors 
and rising profits will also contribute to the dynamism of private expenditure. Growth in 
private consumption and residential investment should also benefit from relatively 
robust wage growth and net worth, as well as from declining unemployment. Euro area 
exports are expected to benefit from the projected recovery in foreign demand. Finally, 
the fiscal stance is expected to be mildly expansionary over the whole horizon (see 
Section 3). 

Nevertheless, the fading-out of some tailwinds would lead to slower growth 
towards the end of the projection horizon. Business investment is expected to 
weaken over the projection horizon, reflecting a prolonged period of low business 
confidence and the expiration of some tax incentives. Employment growth is also 
expected to slow down over the medium run, mostly reflecting increasingly binding 
labour supply shortages in some countries.   

ECB staff macroeconomic projections for the euro area, September 2019 

4 

 
 
Table 1 
Macroeconomic projections for the euro area 

(annual percentage changes) 

September 2019 

June 2019 

2018 

2019 

2020 

2021 

2018 

2019 

2020 

2021 

Real GDP   

1.9 

1.1 

1.2 

1.4 

1.8 

1.2 

1.4 

1.4 

Private consumption 

Government 
consumption 

Gross fixed capital 
formation 

Exports2) 

Imports2) 

Employment 

Unemployment rate   
(percentage of labour force) 

[0.9 - 1.3]1) 

[0.4 - 2.0]1) 

[0.4 - 2.4]1) 

[0.9 - 1.5]1) 

[0.5 - 2.3]1) 

[0.4 - 2.4]1) 

1.4 

1.1 

1.3 

1.5 

1.3 

1.5 

1.3 

1.4 

1.3 

1.1 

1.4 

1.4 

1.4 

1.4 

1.3 

1.4 

2.3 

3.1 

1.9 

2.1 

3.3 

2.7 

2.0 

2.0 

3.5 

2.7 

1.5 

8.2 

2.3 

2.6 

1.1 

7.7 

2.4 

3.1 

0.5 

7.5 

3.0 

3.4 

0.5 

7.3 

3.2 

3.2 

1.5 

8.2 

2.2 

2.7 

1.0 

7.7 

2.9 

3.2 

0.6 

7.5 

3.2 

3.4 

0.6 

7.3 

HICP   

1.8 

1.2 

1.0 

1.5 

1.8 

1.3 

1.4 

1.6 

HICP excluding energy 

HICP excluding energy 
and food 

HICP excluding energy, 
food and changes in 
indirect taxes3) 

Unit labour costs 

Compensation per employee 

Labour productivity 

General government budget 
balance 
(percentage of GDP) 

Structural budget balance   
(percentage of GDP)4) 

General government gross 
debt (percentage of GDP) 

Current account balance   
(percentage of GDP) 

[1.1 - 1.3]1) 

[0.4 - 1.6]1) 

[0.7 - 2.3]1) 

[1.2 - 1.4]1) 

[0.7 - 2.1]1) 

[0.8 - 2.4]1) 

1.3 

1.0 

1.2 

1.1 

1.4 

1.2 

1.6 

1.5 

1.3 

1.0 

1.2 

1.1 

1.5 

1.4 

1.7 

1.6 

1.0 

1.0 

1.2 

1.5 

1.0 

1.1 

1.4 

1.6 

1.7 

2.1 

0.4 

2.1 

2.2 

0.1 

1.7 

2.3 

0.7 

1.5 

2.4 

0.9 

1.9 

2.2 

0.3 

1.8 

2.1 

0.2 

1.6 

2.5 

0.8 

1.7 

2.5 

0.9 

-0.5 

-0.8 

-0.8 

-1.0 

-0.5 

-0.9 

-0.9 

-0.9 

-0.6 

-0.8 

-0.9 

-1.1 

-0.6 

-0.9 

-1.1 

-1.2 

85.4 

83.8 

82.5 

81.2 

85.1 

83.7 

82.1 

80.6 

2.9 

2.6 

2.4 

2.3 

2.9 

2.4 

2.4 

2.4 

Note: Real GDP and components, unit labour costs, compensation per employee and labour productivity refer to seasonally and working 
day-adjusted data. 
1) The ranges shown around the projections are based on the differences between actual outcomes and previous projections carried out 
over a number of years. The width of the ranges is twice the average absolute value of these differences. The method used for 
calculating the ranges, involving a correction for exceptional events, is documented in New procedure for constructing Eurosystem and 
ECB staff projection ranges, ECB, December 2009, available on the ECB’s website. 
2) Including intra-euro area trade.   
3) The sub-index is based on estimates of actual impacts of indirect taxes. This may differ from Eurostat data, which assume a full and 
immediate pass-through of tax impacts to the HICP. 
4) Calculated as the government balance net of transitory effects of the economic cycle and temporary measures taken by governments. 

Real disposable income is expected to gain momentum in 2019 before 
weakening in 2020 and 2021. The strengthening in 2019 reflects an increase in 
nominal disposable income growth and a decline in consumer price inflation. Both 
weakening nominal income growth and gradually rising inflation are expected to 
dampen real income growth in 2020 and 2021. The contribution of gross wages and 
salaries to nominal disposable income growth is projected to decline in 2020 (due to 
the impact of weaker employment growth) and to remain broadly unchanged in 2021. 
Other personal income is projected to increase moderately over the projection 

ECB staff macroeconomic projections for the euro area, September 2019 

5 

 
 
  
  
  
   
   
  
  
   
horizon. The contribution of net fiscal transfers is expected to turn positive in 2019, for 
the first time since 2010, reflecting a mix of cuts in direct taxation and rising transfers 
to households. This positive contribution is expected to decline in 2020 and to turn 
broadly neutral in 2021, in the context of marginally lower transfers to households and 
gradually increasing direct taxation. 

Private consumption growth fell slightly in the second quarter of 2019, partly 
due to an unwinding of a temporary boost seen at the start of the year, but 
should remain solid over the projection horizon. Still relatively favourable 
consumer confidence, expected further improvements in labour market conditions and 
continued growth of real compensation per employee suggest further steady 
consumption growth over the projection horizon, also supported by positive effects of 
some fiscal easing in certain countries. 

Private consumption growth should be supported by favourable financing 
conditions and rising net worth. Nominal bank lending rates are projected to 
decline further in the near term, before stabilising and then increasing modestly in 
2021. Lending rates on mortgages are foreseen to remain somewhat below their 
mid-2019 levels until the end of the projection horizon, while lending rates on 
consumer credit are expected to exceed their current levels by a small margin. Given 
that bank lending rates are projected to stay at low levels and bank lending to 
households is expected to strengthen only moderately in the current and coming 
years, gross interest payments are expected to remain at low levels and, therefore, 
continue to support private consumption. At the same time, gross interest revenues 
are projected to increase slightly, owing to the continued accumulation of 
interest-bearing assets. In addition, net worth is projected to increase further, spurred 
by continued robust valuation gains on real estate holdings which explain more than 
half of the projected increase. Together with the progress achieved in deleveraging, 
rising net worth should also provide support to consumption. 

Box 1 
Technical assumptions about interest rates, exchange rates and commodity prices 

Compared with the June 2019 projections, the technical assumptions include lower oil prices 
and significantly lower interest rates. The technical assumptions about interest rates and 
commodity prices are based on market expectations, with a cut-off date of 19 August 2019. 
Short-term rates refer to the three-month EURIBOR, with market expectations derived from futures 
rates. The methodology gives an average level for these short-term interest rates of -0.4% for 2019 
and -0.6% for 2020 and 2021. The market expectations for euro area ten-year nominal government 
bond yields imply an average level of 0.4% for 2019, 0.1% for 2020 and 0.2% for 2021.2  Compared 
with the June 2019 projections, market expectations for short-term interest rates have been revised 
down by about 10 basis points for 2019, 30 basis points for 2020 and around 40 basis points for 2021, 

2    The assumption for euro area ten-year nominal government bond yields is based on the weighted 

average of countries’ ten-year benchmark bond yields, weighted by annual GDP figures and extended by 
the forward path derived from the ECB’s euro area all-bonds ten-year par yield, with the initial 
discrepancy between the two series kept constant over the projection horizon. The spreads between 
country-specific government bond yields and the corresponding euro area average are assumed to be 
constant over the projection horizon. 

ECB staff macroeconomic projections for the euro area, September 2019 

6 

 
 
 
                                                                    
while euro area ten-year nominal government bond yields have been revised down by around 40 
basis points for 2019, 80 basis points for 2020 and about 90 basis points for 2021.   

As regards commodity prices, on the basis of the path implied by futures markets by taking the 
average of the two-week period ending on the cut-off date of 19 August 2019, the price of a barrel of 
Brent crude oil is assumed to decrease from USD 71.1 in 2018 to USD 62.5 in 2019, and to ease 
further to USD 56.3 in 2021. This path implies that the decline in oil prices in US dollars will be much 
sharper than entailed in the June 2019 projections. The prices of non-energy commodities in US 
dollars are assumed to decline in 2019 but to rebound over the subsequent years of the projection 
horizon.   

Bilateral exchange rates are assumed to remain unchanged over the projection horizon at the 
average levels prevailing in the two-week period ending on the cut-off date of 19 August 2019. This 
implies an average exchange rate of USD 1.12 per euro over the period 2019-21, as in the June 2019 
projections. The effective exchange rate of the euro (against 38 trading partners) appreciated 
moderately compared with the June 2019 projections, reflecting the relative strength of the euro 
against the pound sterling as well as against the Chinese renminbi and other emerging market 
currencies. 

Technical assumptions 

Three-month EURIBOR 
(percentage per annum) 

Ten-year government bond yields 
(percentage per annum) 

Oil price (in USD/barrel) 

Non-energy commodity prices, in USD   
(annual percentage change) 

USD/EUR exchange rate 

Euro nominal effective exchange rate 
(EER38) (annual percentage change) 

September 2019 

June 2019 

2018 

2019 

2020 

2021 

2018 

2019 

2020 

2021 

-0.3 

-0.4 

-0.6 

-0.6 

-0.3 

-0.3 

-0.3 

-0.2 

1.1 

0.4 

0.1 

0.2 

1.1 

0.8 

0.9 

1.1 

71.1 

3.9 

1.18 

5.2 

62.5 

-3.2 

1.12 

-0.6 

57.0 

56.3 

71.1 

3.4 

3.7 

3.9 

1.12 

1.12 

1.18 

0.5 

0.0 

5.2 

68.1 

-3.4 

1.12 

-1.0 

65.8 

62.7 

3.9 

3.8 

1.12 

1.12 

0.1 

0.0 

The expansion of residential investment is expected to continue, albeit at a 
more moderate pace. The recovery in housing investment seems to have lost some 
momentum during the course of 2018, notably in Spain, France and the Netherlands, 
following a period of very strong growth in 2017. Residential investment growth is 
expected to moderate over the projection horizon. This weakening is suggested by a 
decline in building permits granted over the last few months and by recent surveys 
which show a decline in the share of households planning to undertake home 
improvements over the next year, notwithstanding increasing intentions to purchase or 
build a home within the next two years. In addition, capacity constraints in the 
construction sector are expected to be increasingly binding, in particular in Germany 
and the Netherlands. Adverse demographic trends in some countries, including 
Germany and France, are also expected to dampen housing investment.   

Business investment is expected to increase over the projection horizon, albeit 
at a rather subdued pace. Following weakness in the first half of 2019, business 
investment is expected to be rather subdued in the second half of the year, reflecting 

ECB staff macroeconomic projections for the euro area, September 2019 

7 

 
 
 
  
  
the impact of the relative weakness of global trade and concerns about a further 
escalation of trade disputes, as well as fears of a no-deal” Brexit and of a hard landing 
in China. Beyond the short term, however, as uncertainty is assumed to gradually 
dissipate, a number of favourable fundamental factors are expected to support 
business investment in the euro area. First, a higher than usual share of 
manufacturing firms report lack of equipment as a factor limiting production. Second, 
financing conditions are expected to remain very supportive over the projection 
horizon. Third, profits are expected to increase, further adding to the sizeable liquid 
asset overhang firms have built up in recent years. Fourth, companies may increase 
investment as a means of compensating for labour-related supply-side constraints. 
Finally, the leverage ratio of non-financial corporations has declined over recent years, 
driven by a recovery in stock prices, continued accumulation of assets and moderate 
debt financing growth, although consolidated gross indebtedness still stands above 
pre-crisis levels. At the same time, gross interest payments of non-financial 
corporations have declined to record low levels in recent years and are expected to 
increase only gradually in the coming years.   

Extra-euro area exports are projected to be subdued in the rest of 2019 before 
recovering over the remainder of the horizon, largely in line with developments 
in foreign demand (see Box 2). Recent extra-euro area export growth has been 
volatile. Stockpiling ahead of the original Brexit date in March 2019 lifted euro area 
exports to the United Kingdom in the first quarter of this year. In the second quarter this 
effect is estimated to have been reversed, resulting in stagnating extra-euro area 
exports. As short-term trade indicators remain subdued, extra-euro area exports are 
projected to be weak in the second half of 2019, increasing below the pace of foreign 
demand. Thereafter, over the medium term, extra-euro area exports are projected to 
recover and grow broadly in line with foreign demand, resulting in a flat export shares 
path. Extra-euro area import growth is also expected to remain rather weak in the near 
term, reflecting developments in exports themselves and, at the same time, weak 
investment and activity dynamics in some euro area countries. Looking further ahead, 
extra-euro area imports are expected to grow broadly in line with total demand 
(domestic demand plus exports). Overall, the contribution of net trade to real GDP 
growth is expected to be negative during the second half of 2019 before turning 
neutral over the remainder of the projection horizon.   

Box 2 
The international environment 

Global real GDP growth continued to moderate in the first quarter of 2019, mainly reflecting a 
slowdown in several emerging market economies. While activity in China remained stable in the 
first quarter of the year amid resilient private consumption, several other emerging market economies 
in Asia, Latin America, and the Commonwealth of Independent States underwent a large contraction. 
This reflected a combination of adverse idiosyncratic factors (particularly in Brazil and Russia), but 
also other persistent headwinds, such as elevated domestic political uncertainty (particularly in 
Mexico and Brazil). In contrast, GDP growth held up comparatively well in most advanced economies 
in the first quarter owing mainly to temporary favourable factors in some countries (e.g. positive 
contributions from net trade and inventory building in the United States and from stockbuilding prior to 
the first Brexit deadline in the United Kingdom). As the impact of these factors unwound, growth in the 

ECB staff macroeconomic projections for the euro area, September 2019 

8 

 
 
 
advanced economies moderated in the second quarter, in line with the June 2019 projections. In 
particular, in the United States the negative contribution of net trade, as imports stabilised and exports 
fell, weighed on growth in spite of the fiscal stimulus and resilient private consumption. In the United 
Kingdom, the economy contracted in the second quarter owing mainly to a decline in investment. 
Recent survey-based evidence, such as the global composite output Purchasing Managers’ Index 
(PMI) (excluding the euro area), confirms that the global growth momentum likely softened further in 
the second quarter. After a small rebound in July, this index declined again in August, pointing to 
continued subdued global activity.   

Global growth is projected to remain subdued in the second half of 2019. A number of 
headwinds will continue to weigh on the global economy. Global manufacturing activity is expected to 
remain weak, on the back of declining growth in global investment and in consumption of durable 
goods, which form a large part of manufacturing output. Given the current elevated level of 
uncertainty related to the future of international trade relations, global investment growth is unlikely to 
regain traction in the near term. Faced with a slowing global economy, policymakers around the globe 
have adopted a number of measures to mitigate the negative impact of economic headwinds. In 
China, fiscal stimulus measures to cushion the slowdown in domestic demand are expected to have 
an effect mostly in the second half of the year.3  In the United States, in addition to the sizeable 
pro-cyclical fiscal stimulus and the recent agreement on more flexible public spending caps, the 
Federal Reserve System decided to cut its benchmark interest rate with a view to supporting the 
ongoing economic expansion. Moreover, a number of other economies have eased monetary policy 
(e.g. Australia, Brazil, South Korea, Indonesia, India and Turkey) and market expectations embedded 
in the technical assumptions suggest that others will follow suit.   

Over the medium-term global growth is projected to pick up and stabilise at a rate below its 
long-term average of 3.8%. After declining to 3.1% in 2019, from 3.8% in 2018, global growth 
(excluding the euro area) is projected to pick up and stabilise at 3.5% by 2021. Developments in 
global growth are shaped by three main forces. First, in advanced economies, cyclical momentum is 
projected to slow as capacity constraints become increasingly binding, amid positive output gaps and 
low unemployment rates across the key economies, while towards the end of the projection horizon 
policy support would gradually diminish. Second, the progressive slowdown of the Chinese economy 
and its rebalancing from investment to consumption are projected to weigh negatively on global 
growth and on trade in particular. Third, emerging economies (excluding China) are, conversely, 
projected to support global growth as they recover from past recessions and negative output gaps 
increasingly narrow. Compared with the June 2019 projections, the global growth outlook is revised 
down over the projection horizon, reflecting a less dynamic recovery in some emerging market 
economies than previously expected, and, to a lesser extent, the impact of the ongoing trade 
tensions. 

3    For this year, China announced a fiscal stimulus package in the range of 2-3% of GDP. However, only 

some elements of this package have been implemented and announced in detail so far. These include a 
reduction in the VAT rate, effective as of 1 April, which is expected to have a stronger effect in the second 
half of this year, and an increase in the quota for local government borrowing as of the beginning of this 
year, which is expected to be channelled into infrastructure spending by local governments. 

ECB staff macroeconomic projections for the euro area, September 2019 

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The international environment 

(annual percentage changes) 

September 2019 

June 2019 

2018 

2019 

2020 

2021 

2018 

2019 

2020 

2021 

World (excluding euro area) real GDP 

Global (excluding euro area) trade1) 

Euro area foreign demand2) 

3.8 

4.6 

3.7 

3.1 

0.4 

1.0 

3.4 

2.2 

1.9 

3.5 

2.9 

2.7 

3.8 

4.6 

3.6 

3.3 

0.7 

1.7 

3.6 

2.8 

2.6 

3.6 

3.4 

3.1 

1) Calculated as a weighted average of imports. 
2) Calculated as a weighted average of imports of euro area trading partners. 

Global trade is estimated to have decelerated significantly this year, amid slowing global 
industrial activity, heightened trade tensions and, to some extent, a weakening tech cycle. 
National accounts data suggest that, after stalling at the end of 2018, global import growth (excluding 
the euro area) dipped into negative territory in the first quarter of 2019, broadly in line with the June 
2019 projections. The contraction in global trade was broad-based across countries. In addition to 
one-off factors (e.g. temporarily weak domestic demand in the United States given the partial federal 
government shutdown), the weakness in trade stemmed mostly from weak intra-Asia trade. The latter 
appears to be related to the slowdown in China’s domestic demand. Finally, specific shocks related to 
the weakening tech cycle or disruptions in the car industry may have also played a role, though this 
seems confined to specific countries. Global trade growth is expected to broadly stabilise in the 
second quarter.   

Over the medium term global imports are projected to increase gradually, growing at a more 
subdued pace than global activity. The recent escalation of trade tensions, the effects of which will 
continue to be felt into 2020, coupled with a more gradual recovery in emerging economies than 
previously projected, will contribute to a slower recovery in global trade. Global import growth 
(excluding the euro area) is expected to decline markedly, from 4.6% in 2018 to 0.4% this year, before 
recovering to 2.2% and 2.9% in 2020 and 2021 respectively. Higher tariffs are expected to reduce 
global trade, adversely affecting euro area foreign demand. Empirical analysis suggests that trade 
diversion towards third markets, including the euro area, which could cushion the negative impact of 
higher tariffs on global trade, is so far very limited. Euro area foreign demand, which expanded by 
3.7% last year, is expected to slow down to 1.0% in 2019, before increasing gradually to 1.9% and 
2.7% in 2020 and 2021 respectively. Compared with the June 2019 projections, it has been revised 
down notably over the entire projection horizon. In addition to the impact of tariffs, these revisions also 
reflect broad-based weakness in import momentum across both advanced and emerging economies 
on the back of a weaker growth outlook. The global trade outlook, as embedded in the September 
2019 projections, remains below that of most recent projections by other institutions, mostly for 2019.   

Employment growth is projected to be subdued, in part reflecting temporary 
factors in the short term, while labour supply constraints are expected to 
emerge later in the horizon. Eurostat’s flash estimate of headcount employment 
growth in the second quarter of 2019 was 0.2%, quarter on quarter, indicating a 
slowing of momentum compared with the past four years. Employment growth is 
projected to remain rather subdued over the projection horizon as labour supply is 
expected to limit further employment growth, while labour demand is also projected to 
moderate in line with the slowdown in activity.   

ECB staff macroeconomic projections for the euro area, September 2019 

10 

 
 
 
  
  
Labour force growth is expected to moderate over the projection horizon. The 
labour force is expected to continue to expand, reflecting the projected net immigration 
of workers, the expected integration of refugees and ongoing increases in the 
participation rate. Nevertheless, these factors are projected to fade over the projection 
horizon and the adverse impact of the ageing of the population on labour force growth 
is therefore expected to increase, as older cohorts leave the workforce in higher 
numbers than younger cohorts enter it.   

The unemployment rate is expected to decline to 7.3% in 2021. The 
unemployment rate declined to 7.6% in the second quarter of 2019, which is the 
lowest level observed since the third quarter of 2008. Looking ahead, it is projected to 
remain broadly unchanged from its current level until the beginning of 2020, and to 
decrease thereafter. While the decline in the unemployment rate is expected to be 
broadly based across countries, rates of unemployment in 2021 are expected to still 
exhibit substantial differences.   

Labour productivity is projected to recover over the projection horizon. After 
recording strong momentum in 2017, per worker and per hour labour productivity 
growth declined in 2018, reflecting the unexpected weakening of activity. Productivity 
growth is expected to pick up to 0.9% by 2021, as activity is expected to regain 
momentum while labour input growth slows down.   

Compared with the June 2019 projections, real GDP growth is revised down in 
2019 and 2020, while it is unrevised for 2021. Given the continued weakness in 
sentiment indicators, mainly reflecting more persistent weakness in global trade than 
previously expected and global uncertainties, the short-term outlook has been revised 
down for both the third quarter and the fourth quarter of 2019. These revisions imply a 
weaker carry-over in 2020, reducing annual GDP growth in that year. The quarterly 
profile of economic growth, however, remains unrevised from early 2020, as the 
impact of sizeable downward revisions to foreign demand is broadly offset by the 
impact of more favourable financing conditions and lower oil prices.   

Box 3 
How resilient has euro area domestic demand been to external shocks? 

This box highlights some evidence regarding the resilience of euro area domestic demand 
with regard to adverse external shocks. The slowdown in euro area real GDP growth in the period 
from the fourth quarter of 2017 to the second quarter of 2019 was largely associated with a 
weakening of net trade, while the contribution to the slowdown from domestic demand was markedly 
smaller (see Chart A). Domestic demand growth is expected to remain rather resilient over the 
projection horizon, supporting real GDP growth, while the contribution from net exports will turn 
neutral.   

ECB staff macroeconomic projections for the euro area, September 2019 

11 

 
 
 
Chart A 
GDP and expenditure components 

(average quarter-on-quarter growth; contributions) 

Q4 2016-Q4 2017
Q1 2018-Q1 2019
Q2 2019

Q3-Q4 2019
2020
2021

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0

-0.1

-0.2

GDP

Domestic demand

Net exports

Inventories

Sources: Eurostat, September 2019 ECB staff macroeconomic projections and ECB calculations. 
Note: The decomposition of GDP in the second quarter of 2019 was not available by the cut-off date for the projections and was therefore estimated by ECB staff. 

According to ECB models, growth in euro area domestic demand has deteriorated as a result 
of external weakness to a lesser extent than implied by historical regularities. Adverse external 
developments have clearly played an important role in the economic slowdown since the end of 2017, 
mainly via a weakening of export growth. In the course of 2018, the adverse external shock spilled 
over to domestic demand. However, ECB models that gauge the drivers of the GDP growth path over 
time suggest that in the case of domestic demand there have also been some positive factors at play 
over the past year which cushioned the adverse impact of weaker external demand. This may be 
interpreted as a sign of domestic demand resilience, as domestic demand deteriorated in response to 
the external shocks to a lesser extent than implied by historical regularities, as captured by ECB 
models. In turn, this resilience of domestic demand could be due to the strength of the labour market 
as well as other supporting factors. 

The resilience of euro area domestic demand to adverse external shocks may be partly 
related to the absorption capacity4  of the labour market. Employment growth and the 
unemployment rate have shown a high degree of resilience since 2017, with unexpectedly robust 
employment growth despite the deceleration in activity. An estimated simple static relationship 
between employment/unemployment and GDP illustrates this point (see Chart B). Employment 
growth was increasingly higher than predicted by the Okun relationship during the course of 2018, 
and was 0.5 percentage points above its predicted level in the second quarter of 2019. Recently total 
hours worked have also grown more strongly than predicted, while the unemployment rate has 
trended below its predicted value.5  These developments are particularly related to the extensive job 
creation in the services sector. One possible factor behind the resilience of the labour market is that 
external trade is far less labour-intensive than other components of GDP. Hence, adverse external 

4    The absorption capacity can also be thought of as the ability of an economy to cushion the direct impact 
of a shock, i.e. minimising the direct output and job losses by affecting other variables which act as 
stabilisers, namely responsive wages and prices, credit provision and financial risk sharing. See 
European Commission (2017). 

5    See “Employment growth and GDP in the euro area”, Economic Bulletin, Issue 2, ECB, Frankfurt am 

Main, 2019. 

ECB staff macroeconomic projections for the euro area, September 2019 

12 

 
 
                                                                    
 
trade shocks may have had a rather limited downward impact on the labour market compared with 
adverse domestic demand shocks.6 

Chart B 
Residuals from static Okun estimates 

(percentage points) 

Unemployment rate
Total employment
Total hours worked

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

-2.5

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

3
Q

4
Q

1
Q

2
Q

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Sources: ECB staff computations on Eurostat data and the September 2019 projections. 
Notes: A positive residual indicates that the variable in question reached a level higher than that predicted by the Okun relationship. The chart shows the 
residuals that refer to the unemployment rate and to the year-on-year growth rates of total employment and total hours worked. Estimates are based on data for 
the period between the first quarter of 1998 and the second quarter of 2019. Residuals are from a static Okun relationship that relates the year-on-year changes 
in the unemployment rate, the year-on-year growth rate of total employment and the year-on-year growth rate of total hours to the contemporaneous 
year-on-year growth rate of real GDP. 

Several other factors, in addition to the labour market, may have also contributed to the 
resilience of euro area domestic demand in the assessed period. These factors comprise the 
accommodative monetary policy stance supporting financing conditions, improvements in the 
balance sheets of non-financial corporations and households including private sector deleveraging 
and increasing net wealth, expectations of dynamic growth in the gross operating surplus and some 
fiscal easing. 

In sum, the slowdown in euro area activity since 2017 is largely explained by a weaker 
external environment, while domestic demand has been relatively resilient, largely as a result 
of the strength of the labour market. Looking ahead, the September 2019 projections feature the 
assessment that despite the downward revision to the external environment, the labour market will 
continue to support household disposable income and other factors supporting domestic demand will 
remain in place, albeit to a lesser extent than in the recent past. 

6    See Anderton, R. Aranki, T., Bonthuis, B. and Jarvis, V, “Disaggregating Okun’s Law: Decomposing the 
impact of the expenditure components of GDP on euro area unemployment”, Working Paper Series, No 
1747, ECB, Frankfurt am Main, December 2014.   

ECB staff macroeconomic projections for the euro area, September 2019 

13 

 
 
 
                                                                    
 
2 

Prices and costs 

HICP inflation is expected to average 1.2% in 2019, decline to 1.0% in 2020 and 
reach 1.5% in 2021 (see Chart 2). HICP inflation will be volatile around rather 
subdued levels until the second half of 2020, mainly reflecting developments in HICP 
energy inflation related to recent oil price declines, downward and upward base 
effects, and, to a small extent, lower administered prices for electricity and gas. Until 
the end of 2020 HICP energy inflation will remain negative and will only turn positive in 
2021 as the oil price futures curve stabilises. After increasing in the near term due to 
lagged effects from past increases in farm gate prices, HICP food inflation is 
envisaged to hover around rates of 1.9%. HICP inflation excluding energy and food will 
move sideways in the course of 2020 and strengthen to 1.5% in 2021. The moderate 
upward path of underlying inflation is expected to be supported by the expected 
pick-up in activity and the associated recovery in profit margins as past increases in 
labour costs feed into prices. As a result, domestic cost pressures would rise. Rising 
non-energy commodity prices and underlying global inflation are also expected to 
provide some support to underlying inflation. 

Chart 2 
Euro area HICP 

(year-on-year percentage changes) 

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: The ranges shown around the central projections are based on the differences between actual outcomes and previous projections 
carried out over a number of years. The width of the ranges is twice the average absolute value of these differences. The method used 
for calculating the ranges, involving a correction for exceptional events, is documented in “New procedure for constructing Eurosystem 
and ECB staff projection ranges”, ECB, December 2009, available on the ECB’s website. 

Growth in compensation per employee is projected to be relatively robust as 
labour markets remain tight. Following a spike in 2019 in the context of the cyclical 
slowdown in productivity growth, unit labour cost growth is expected to moderate 
somewhat over the projection horizon as productivity growth is envisaged to 
strengthen alongside economic growth. The main driver supporting wage growth is the 
envisaged increase in labour market tightness in some parts of the euro area. Beyond 
the cyclical momentum, the pick-up in headline inflation over the last two years can 
also be expected to contribute to relatively robust wage growth in euro area countries 
where wage formation processes include backward-looking elements. In addition, 

ECB staff macroeconomic projections for the euro area, September 2019 

14 

 
 
 
some countries have introduced increases in minimum wages that might pass through 
to the wage distribution. 

Profit margins are expected to develop more favourably over the projection 
horizon than in 2018. Profit margins have been squeezed over the past few quarters 
by a surge in unit labour costs and past increases in oil prices that weighed on the 
terms of trade, adversely affecting profit margin developments. These factors should 
become less important following recent declines in oil prices and as economic activity 
regains pace. 

Import price inflation is expected to recede in 2019 and to rise moderately over 
the remainder of the projection horizon. Following a strong growth rate in 2018, the 
annual growth rate of the import deflator is envisaged to decline in 2019 and then 
gradually increase by 2021. This profile is strongly determined by movements in oil 
prices, which pushed up import prices in 2018 and will dampen them over the 
projection horizon, although their effect will gradually decline as the downward sloping 
oil futures curve flattens out towards the end of the horizon. At the same time, rising 
non-oil commodity prices and underlying global price pressures should provide some 
– albeit more moderate – support, to import price inflation. 

Compared with the June 2019 projections, the projection for HICP inflation is 
revised down over the whole horizon. These revisions are largely explained by the 
energy component which is revised notably downwards for both 2019 and 2020, due 
to lower oil prices. In addition, HICP inflation excluding energy and food is also revised 
downwards, reflecting weaker data outturns, weaker activity and indirect effects from 
lower energy prices, as well as persistent past over-predictions.   

ECB staff macroeconomic projections for the euro area, September 2019 

15 

 
 
3 

Fiscal outlook 

The euro area aggregate fiscal stance is assessed to be mildly expansionary 
over the entire projection horizon. The fiscal policy stance is measured as the 
change in the cyclically adjusted primary balance net of government support to the 
financial sector. After having been neutral in 2018, the fiscal stance is projected to 
become mildly expansionary in 2019, mostly on account of cuts to direct taxes as well 
as public expenditure increases in some countries. For 2020, a slightly larger fiscal 
loosening is projected, mainly due to further cuts to direct taxes as well as higher 
transfers in some countries. For 2021, the bulk of the fiscal loosening stems from 
Germany on account of higher expenditure growth and the newly approved partial 
repeal of the solidarity surcharge, which reduces the direct tax burden on households. 

The euro area budget balance is projected to deteriorate over the entire 
projection horizon, while the debt ratio remains on a downward path. The largest 
deterioration in the balance is seen in 2019 on account of the expansionary fiscal 
stance. Thereafter the headline budget balance deteriorates at a slower pace, as the 
additional loosening of the fiscal stance is partly compensated by savings in interest 
payments, while the cyclical component remains largely unchanged. The declining 
path of the government debt-to-GDP ratio is supported by primary surpluses, albeit 
declining over time, and by a favourable interest rate-growth rate differential. 

The euro area fiscal outlook remains broadly unchanged compared with the 
June 2019 projections. The slightly higher budget deficit at the end of the projection 
horizon reflects the additional fiscal loosening and the deterioration in the cyclical 
component, which are partly compensated by lower interest expenditure. The debt 
ratio is projected to be on a slightly higher path compared with the June 2019 
projections, on account of upward revisions to the interest rate-growth rate differential 
and lower primary surpluses. 

Box 4 
Sensitivity analyses 

Projections rely heavily on technical assumptions regarding the evolution of certain key 
variables. Given that some of these variables can have a large impact on the projections for the euro 
area, examining the sensitivity of the latter with respect to alternative paths of these underlying 
assumptions can help in the analysis of risks around the projections. This box discusses the 
uncertainty around some key underlying assumptions and the sensitivity of the projections with 
respect to these variables.   

1) Alternative oil price paths 

This sensitivity analysis aims to assess the implications of alternative oil price paths. The 
technical assumptions for oil price developments underlying the baseline projections, based on oil 
futures markets, predict a slightly declining profile for oil prices, with the price per barrel of Brent crude 
oil at about USD 56 by the end of 2021. Two alternative oil price paths are analysed. The first is based 

ECB staff macroeconomic projections for the euro area, September 2019 

16 

 
 
 
on the 25th percentile of the distribution provided by the option-implied densities for the oil price on 19 
August 2019. This path implies a gradual decrease of the oil price to USD 42 per barrel in 2021, which 
is 25% below the baseline assumption for that year. Using the average of the results from a number of 
staff macroeconomic models, this path would have a small upward impact on real GDP growth 
(around 0.1 percentage points in 2020 and 2021), while HICP inflation would be 0.1 percentage 
points lower in 2019, 0.6 percentage points lower in 2020 and 0.4 percentage points lower in 2021. 
The second path is based on the 75th percentile of the same distribution and implies an increase of 
the oil price to around USD 69 per barrel in 2021, which is 22% above the baseline assumption for this 
year. This path would entail a faster increase in HICP inflation, which would be 0.1 percentage points 
higher in 2019, 0.5 percentage points higher in 2020 and 0.3 percentage points higher in 2021, while 
real GDP growth would be slightly lower (down by 0.1 percentage points in 2020 and 2021). 

2) An alternative exchange rate path 

This sensitivity analysis investigates the effects of a strengthening of the exchange rate of 
the euro. This scenario is consistent with the distribution of the option-implied risk-neutral densities 
for the USD/EUR exchange rate on 19 August 2019, which is heavily skewed towards an appreciation 
of the euro. The 75th percentile of that distribution implies an appreciation of the euro vis-à-vis the US 
dollar to an exchange rate of USD 1.25 per euro in 2021, which is 12% above the baseline 
assumption for that year. The corresponding assumption for the nominal effective exchange rate of 
the euro reflects historical regularities, whereby changes in the USD/EUR exchange rate correspond 
to changes in the effective exchange rate with an elasticity of just above one half. In this scenario, the 
average of the results from a number of staff macroeconomic models points to both real GDP growth 
and HICP inflation being 0.3 percentage points lower in 2020 and 0.4-0.5 percentage points lower in 
2021.   

Box 5 
Forecasts by other institutions 

A number of forecasts for the euro area are available from both international organisations 
and private sector institutions. However, these forecasts are not strictly comparable with one 
another or with the ECB/Eurosystem staff macroeconomic projections, as they were finalised at 
different points in time. Additionally, they use different (partly unspecified) methods to derive 
assumptions for fiscal, financial and external variables, including oil and other commodity prices. 
Finally, there are differences in working day adjustment methods across different forecasts (see the 
table).   

As indicated in the table, most other institutions’ currently available projections for real GDP 
growth and HICP inflation are within the ranges surrounding the staff projections (shown in 
square brackets in the table). The figure for HICP inflation in 2020 is notably lower than all other 
forecasts, possibly on account of more up-to-date oil price assumptions in the September 2019 
projections. 

ECB staff macroeconomic projections for the euro area, September 2019 

17 

 
 
 
 
 
Comparison of recent forecasts for euro area real GDP growth and HICP inflation 

(annual percentage changes) 

Date of release 

2019 

2020 

2021 

2019 

2020 

2021 

GDP growth 

HICP inflation 

ECB staff projections 

September 2019 

1.1 

1.2 

1.4 

1.2 

1.0 

1.5 

OECD 

Euro Zone Barometer 

Consensus Economics   

European Commission 

Survey of Professional Forecasters 

IMF 

May 2019 

August 2019 

August 2019 

July 2019 

July 2019 

July 2019 

[0.9 - 1.3] 

[0.4 - 2.0] 

[0.4 - 2.4] 

[1.1 - 1.3] 

[0.4 - 1.6] 

[0.7 - 2.3] 

1.2 

1.1 

1.1 

1.2 

1.2 

1.3 

1.4 

1.1 

1.2 

1.4 

1.3 

1.6 

- 

1.2 

1.2 

- 

1.4 

  - 

1.2 

1.3 

1.3 

1.3 

1.3 

- 

1.5 

1.4 

1.4 

1.3 

1.4 

- 

- 

1.5 

1.6 

- 

1.5 

- 

Sources: OECD Economic Outlook, May 2019 ; MJEconomics for the Euro Zone Barometer, August 2019 survey; Consensus Economics Forecasts, August 
2019 survey; European Commission Economic Forecast, Summer 2019 interim Economic Forecast; ECB’s Survey of Professional Forecasters, 2019Q3; IMF 
World Economic Outlook Update, July 2019. 
Notes: The Eurosystem and ECB staff macroeconomic projections and the OECD forecasts both report working day-adjusted annual growth rates, whereas the 
European Commission and the IMF report annual growth rates that are not adjusted for the number of working days per annum. Other forecasts do not specify 
whether they report working day-adjusted or non-working day-adjusted data. 

ECB staff macroeconomic projections for the euro area, September 2019 

18 

 
 
 
 
  
  
  
  
  
© European Central Bank, 2019 

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Telephone 
Website 

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For specific terminology please refer to the ECB glossary (available in English only). 

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