Eurosystem staff macroeconomic projections for the euro area. December 2019.
Date: 2019-12-09
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

Eurosystem staff 
macroeconomic 
projections for the euro 
area 

December 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 Cross-country and cross-sector spillovers in the euro area 

2 

3 

Prices and costs 

Fiscal outlook 

Box 4 Sensitivity analyses 

Box 5 Forecasts by other institutions 

2 

3 

6 

8 

10 

13 

15 

15 

16 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

1 

 
 
 
 
Overview 

Following weak growth in the second and third quarters of 2019, real GDP growth is 
expected to remain subdued in the near term. Economic sentiment indicators have 
declined, mainly reflecting the ongoing weakness in global trade in an environment of 
continued global uncertainties (related to increased protectionism, a potential sharper 
slowdown in China and a no-deal Brexit). Nevertheless, the most recent indicators on 
manufacturing show some stabilisation, while sentiment in the construction sector and 
consumer confidence have exhibited more resilience, and the labour market situation 
remains favourable. Beyond the near term, the very favourable financing conditions 
(fostered by the ECB’s highly accommodative monetary policy stance), the 
assumption of an orderly Brexit and some dissipation of other global uncertainties, the 
associated gradual recovery in foreign demand and notable fiscal easing should all 
support a sustained recovery in growth over the medium term. Overall, real GDP 
growth is projected to decline slightly to 1.1% in 2020, before increasing to 1.4% in 
2021 and 2022. Compared with the September 2019 projections, growth has been 
revised down by 0.1 percentage points in 2020, as the impact of sizeable downward 
revisions to foreign demand is only partially offset by the impact of more supportive 
fiscal and monetary policies and an effective depreciation of the euro.   

After weakening in 2019, HICP inflation is expected to slow further in 2020, before 
gradually rising to 1.6% by 2022. The profile for headline inflation in the coming 
quarters will be heavily affected by base effects in energy inflation. Following a rise at 
the end of 2019, HICP inflation excluding energy and food is expected to strengthen 
gradually over the projection horizon. It should be supported by strengthening 
economic growth, by relatively robust wage growth amid tight labour markets and by 
recovering profit margins as activity regains pace, aided by, among other things, the 
recent monetary policy package. Rising non-energy commodity prices should also 
support underlying inflation. Compared with the September 2019 projection exercise, 
HICP inflation has been revised upwards for 2020 owing to higher oil prices and 
revised slightly downwards for 2021 owing to lower external price pressures and 
weaker developments in wages and profit margins.1 

1    The cut-off date for technical assumptions, such as for oil prices and exchange rates, was 19 November 
2019 (see Box 1). The cut-off date for including other information in this exercise was 27 November 2019. 
The current macroeconomic projection exercise covers the period 2019-22. 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. 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

2 

 
 
                                                                    
1 

Real economy 

Real GDP growth in the euro area was 0.2% in the third quarter of 2019, slightly 
stronger than expected in the September 2019 projections. Domestic demand 
contributed positively to growth in the third quarter of 2019, whereas net trade and 
changes in inventories had a slight dampening impact. The moderate growth in 
exports reflects global headwinds and, in particular, sluggish global activity and foreign 
demand in the context of elevated global uncertainty. Private consumption growth was 
resilient in the third quarter and remained the main driver of growth. 

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

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

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 subdued growth in the near term. The Economic 
Sentiment Indicator compiled by the European Commission improved in November, 
following two months of decline, but remains below the average for the third quarter. 
Ongoing weakness in global trade and continued high uncertainty (related to global 
trade disputes, the possibility of a disorderly Brexit and risks of a steeper slowdown in 
China) weigh on business expectations. This is particularly the case in the 
manufacturing sector, where sentiment remains well below its longer-term average. 
By contrast, sentiment in the construction sector, as well as consumer confidence, 
have continued to exhibit resilience. The Purchasing Managers’ Indices continue to 
signal divergence across sectors, with manufacturing data remaining far below the 
growth threshold of 50, albeit stabilising somewhat recently, while the indices related 
to the services and construction sectors stand above 50. Spillovers from the 
manufacturing to the services sector have so far been contained and are broadly as 
expected given the limited exposure of the services sector to the global shocks which 
have adversely affected manufacturing (see Box 3). Overall, the latest indicators 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

3 

 
 
 
 
suggest that the weak growth seen in the second and third quarters will continue into 
the final months of 2019 and early 2020. 

Over the medium term the projections assume some dissipation of global 
headwinds, allowing the fundamental factors supporting the euro area 
expansion to regain traction (see Chart 1 and 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 steep slowdown in China. Thus, the current level of uncertainty will 
gradually decline, allowing the fundamentals supporting growth to regain traction. 
Financing conditions are expected to remain very accommodative and the ECB’s 
monetary policy measures, including the September 2019 monetary policy package, 
will continue to be transmitted to the economy. More specifically, the technical 
assumptions imply that nominal interest rates would increase only modestly from their 
current low levels over the projection horizon. After remaining broadly unchanged in 
the near term, lending to the non-financial private sector should also strengthen 
modestly, spurred by an improving macroeconomic environment, very low interest 
rates and favourable bank lending conditions for both households and non-financial 
corporations. Lower deleveraging needs and improved debt servicing capacity 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 growth in wages and net worth, as well as from declining 
unemployment. Euro area exports are expected to benefit from the projected recovery 
in foreign demand and the recent depreciation of the euro in effective terms. Finally, 
the fiscal stance is expected to loosen over 2020-2021 and to be broadly neutral in 
2022 (see Section 3). 

Nevertheless, the fading-out of some tailwinds would lead to a marginally 
slower growth profile in the course of 2022. Employment growth is expected to 
slow over the medium term, mostly reflecting increasingly binding labour supply 
constraints in some countries. 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

4 

 
 
Table 1 
Macroeconomic projections for the euro area 

(annual percentage changes) 

December 2019 

September 2019 

2019 

2020 

2021 

2022 

2019 

2020 

2021 

Real GDP   

1.2 

1.1 

1.4 

1.4 

1.1 

1.2 

1.4 

[1.1 - 1.3]1) 

[0.5 - 1.7]1) 

[0.5 - 2.3]1) 

[0.4 - 2.4]1) 

[0.9 - 1.3]1) 

[0.4 - 2.0]1) 

[0.4 - 2.4]1) 

Private consumption 

Government consumption 

Gross fixed capital formation 

Exports2) 

Imports2) 

Employment 

Unemployment rate   
(percentage of labour force) 

1.3 

1.5 

4.5 

2.3 

3.1 

1.1 

7.6 

1.4 

1.6 

1.7 

1.9 

2.5 

0.6 

7.4 

1.3 

1.5 

1.9 

2.5 

2.8 

0.5 

7.2 

1.2 

1.5 

2.1 

2.6 

2.8 

0.4 

7.1 

1.3 

1.5 

3.1 

2.3 

2.6 

1.1 

7.7 

1.3 

1.5 

1.9 

2.4 

3.1 

0.5 

7.5 

1.3 

1.4 

2.1 

3.0 

3.4 

0.5 

7.3 

HICP   

1.2 

1.1 

1.4 

1.6 

1.2 

1.0 

1.5 

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) 

[1.2 - 1.2]1) 

[0.6 - 1.6]1) 

[0.7 - 2.1]1) 

[0.8 - 2.4]1) 

[1.1 - 1.3]1) 

[0.4 - 1.6]1) 

[0.7 - 2.3]1) 

1.2 

1.0 

1.4 

1.3 

1.5 

1.4 

1.6 

1.6 

1.2 

1.1 

1.4 

1.2 

1.6 

1.5 

1.0 

1.3 

1.4 

1.6 

1.0 

1.2 

1.5 

2.0 

2.1 

0.1 

1.5 

2.1 

0.6 

1.4 

2.3 

0.9 

1.4 

2.5 

1.0 

2.1 

2.2 

0.1 

1.7 

2.3 

0.7 

1.5 

2.4 

0.9 

-0.7 

-0.9 

-1.1 

-1.1 

-0.8 

-0.8 

-1.0 

-1.0 

-1.3 

-1.5 

-1.4 

-0.8 

-0.9 

-1.1 

84.5 

83.4 

82.3 

81.1 

83.8 

82.5 

81.2 

2.6 

2.4 

2.3 

2.3 

2.6 

2.4 

2.3 

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. 

Private consumption growth firmed in the third quarter of 2019 and should 
moderate slightly over the projection horizon. It increased from 0.2% in the 
second quarter of 2019 to 0.5% in the third quarter in an environment of resilient 
consumer confidence and favourable labour market conditions. Looking ahead, the 
quarterly dynamics of private consumption are expected to be slightly stronger on 
average in the second half of 2019 than in the first half, partly due to a lagged reaction 
of consumption to the government measures supporting income in a number of large 
countries. In 2020 still relatively favourable consumer confidence, expected further 
declines in unemployment and continued growth of real wages per employee suggest 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

5 

 
 
 
  
  
a pick-up in consumption growth, also supported by the positive effects of fiscal 
loosening in some countries. Consumption growth is expected to moderate slightly in 
2021-22, in line with lower real disposable income growth in these two years. 

Private consumption growth should be supported by favourable financing 
conditions and rising net worth. Nominal bank lending rates are projected to 
decline slightly further in the near term, before stabilising and then increasing 
modestly in 2021-22. Given that bank lending rates and bank lending volumes to 
households are projected to increase only moderately in the coming years, gross 
interest payments are expected to remain at low levels and, therefore, continue to 
support private consumption. In addition, net worth is projected to increase further in 
real terms in 2020-2022, spurred by the continued robust valuation gains on real 
estate holdings. Together with the earlier progress achieved in deleveraging, rising net 
worth should also provide moderate support to consumption. 

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

Compared with the September 2019 projections, the technical assumptions include higher oil 
prices, a weaker effective exchange rate and higher interest rates. The technical assumptions 
about interest rates and commodity prices are based on market expectations, with a cut-off date of 19 
November 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, 2020 and 2021 and -0.3% for 2022. The market expectations for euro area ten-year 
nominal government bond yields imply an average level of 0.4% for 2019, 0.3% for 2020, 0.4% for 
2021 and 0.6% for 2022.2  Compared with the September 2019 projections, market expectations for 
short-term interest rates have been revised up by about 20 basis points for 2020 and around 25 basis 
points for 2021, while euro area ten-year nominal government bond yields have been revised up by 
around 20 basis points for 2020 and 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 November 2019, the price of a barrel 
of Brent crude oil is assumed to stand at USD 63.8 in 2019 and to ease to USD 56.8 by 2022. This 
path implies that, in comparison with the September 2019 projections, oil prices in US dollars are 
higher over the full horizon. The prices of non-energy commodities in US dollars are estimated to 
have declined in 2019 but are assumed to rebound over the subsequent years. 

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 November 2019. 
This implies an average exchange rate of USD 1.12 per euro in 2019 and USD 1.10 per euro over the 
period 2020-22, which is slightly lower than in the September 2019 projections. The effective 
exchange rate of the euro (against 38 trading partners) has depreciated by 1.6% since the September 

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. 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

6 

 
 
 
                                                                    
2019 projections, reflecting an appreciation of the pound sterling, as fears of an imminent no-deal 
Brexit have faded, and the relative strength of some 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) 

December 2019 

September 2019 

2019 

2020 

2021 

2022 

2019 

2020 

2021 

-0.4 

-0.4 

-0.4 

-0.3 

-0.4 

-0.6 

-0.6 

0.4 

0.3 

0.4 

0.6 

0.4 

0.1 

0.2 

63.8 

-3.8 

1.12 

-1.1 

59.6 

3.8 

1.10 

-0.7 

57.4 

2.6 

1.10 

0.0 

56.8 

2.4 

1.10 

0.0 

62.5 

-3.2 

1.12 

-0.6 

57.0 

3.4 

1.12 

0.5 

56.3 

3.7 

1.12 

0.0 

Growth in housing investment is expected to continue, albeit at a more 
moderate pace. Over the short term, confidence indicators for the construction sector 
suggest a continued, but moderate, expansion of housing investment. Ongoing 
moderate growth is also suggested by an easing in the number of building permits 
granted, as well as by recent surveys which show a decline in the share of households 
planning to undertake home improvements over the next year. In the medium term, 
housing investment growth is expected to stabilise at low levels, reflecting increasingly 
binding capacity constraints in the construction sector in some countries. Adverse 
demographic trends in some countries are also expected to dampen housing 
investment in the medium term. 

Business investment is expected to remain subdued in the short term, before 
gradually gathering pace over the projection horizon. Business investment 
growth is expected to remain muted in the short term, largely on account of adverse 
cyclical effects associated with weak external demand, a decline in capacity utilisation 
towards its historical average and elevated uncertainty. In the medium term, business 
investment growth is expected to gather pace but to be less dynamic than in previous 
years, reflecting the relatively modest developments in global trade as well as lower 
new plant capacity needs. In the longer term, however, as uncertainty is assumed to 
dissipate, a number of favourable fundamental factors are expected to support 
business investment. First, with aggregate demand remaining strong for a number of 
years, firms will strengthen their investment so that their productive capital stock 
expands. Second, financing conditions are expected to remain very supportive over 
the projection horizon. Third, profit margins are expected to improve, which should 
support investment growth. Fourth, support to business investment should come from 
a decline in the leverage ratio of non-financial corporations over recent years driven by 
a recovery in stock prices, the continued accumulation of assets and moderate debt 
financing growth, although consolidated gross indebtedness still stands above 
pre-crisis levels and is expected to increase moderately over the projection horizon. 
Finally, the gross interest payments of non-financial corporations have declined to 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

7 

 
 
 
  
  
record low levels in the past few years and are expected to increase only gradually in 
the coming years, supporting business investment.   

Box 2 
The international environment 

The latest available data confirm a sharp decline in global real GDP growth (excluding the euro 
area) in 2019. Following a sharp deceleration in the second half of 2018, the global economy remained 
weak in the course of 2019, marking the weakest period of growth momentum since the global financial 
crisis. Weak manufacturing and investment, amid rising trade policy uncertainty, continue to represent 
the key headwinds to the global economy, only partially offset by the policy stimulus provided in several 
countries to counteract the weakening outlook. The economic weakness seen across emerging market 
economies was stronger than expected owing to idiosyncratic shocks at the turn of the year, as well as 
structural problems in some of these countries. Across advanced economies, supportive economic 
policies and some favourable temporary factors helped to cushion the slowdown.   

Over the medium term, global growth is projected to pick up only slightly, reflecting a 
moderate recovery in emerging market economies which offsets a decline in growth in 
advanced economies and China. After declining to 2.9% in 2019, from 3.8% in 2018, global growth 
(excluding the euro area) is projected to recover gradually, reaching 3.4% by 2022. Developments in 
global growth are shaped by three main forces. A slowing cyclical momentum in most advanced 
economies and the gradual transition of China to a lower growth path will weigh on global growth. 
Conversely, a favourable base effect owing to a stabilisation of activity in those emerging market 
economies which experienced a severe recession (e.g. Argentina, Venezuela and Iran) will contribute 
to the recovery. Compared with the September 2019 projections, the global growth outlook has been 
revised down over the projection horizon, reflecting a less dynamic recovery than previously 
expected in some emerging market economies and, to a smaller extent, the impact of the ongoing 
global trade tensions.   

Global trade (excluding the euro area) has declined significantly in the course of 2019, amid 
recurring escalations of trade tensions and slowing industrial activity. Across advanced 
economies, trade is projected to return to moderate growth in the third and fourth quarters of 2019, 
supported by a normalisation of imports in the United Kingdom (after the sharp drop in the second 
quarter following the exceptional stockbuilding at the start of 20193) and a pick-up in imports in central 
and eastern European EU countries after a temporary slowdown in the second quarter. Across 
emerging market economies, trade is expected to dip into negative territory in the third quarter, owing 
to trade headwinds in China, the economic slowdown in India and political turbulence in Latin 
America. However, trade in these economies is expected to broadly stabilise in the fourth quarter.   

3   

In the first quarter of 2019, UK imports grew by 10% (quarter on quarter) on account of 
stockpiling ahead of the first Brexit deadline of 29 March. Subsequently, in the second 
quarter, an unwinding of stockpiling led to a contraction in imports by 13%.   

Eurosystem staff macroeconomic projections for the euro area, December 2019 

8 

 
 
 
                                                                    
The international environment 

(annual percentage changes) 

World (excluding euro area) real GDP 

Global (excluding euro area) trade1) 

Euro area foreign demand2) 

December 2019 

September 2019 

2019 

2020 

2021 

2022 

2019 

2020 

2021 

2.9 

0.0 

0.7 

3.1 

0.8 

1.0 

3.3 

2.4 

2.3 

3.4 

2.7 

2.6 

3.1 

0.4 

1.0 

3.4 

2.2 

1.9 

3.5 

2.9 

2.7 

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

Over the medium term global imports (excluding the euro area) are projected to increase 
gradually but at a more subdued pace than global activity. The further escalation of global trade 
tensions (the effects of which will continue to be felt into 2020), a more gradual recovery in emerging 
market economies than previously projected and the structural rebalancing of the Chinese economy 
will all contribute to a postponement in the recovery of global trade. As a result, the elasticity of trade 
to output is projected to return to the unit value only beyond the projection horizon. Growth in global 
imports (excluding the euro area) is expected to decrease markedly from 4.6% in 2018 to zero this 
year, before recovering to growth rates of 0.8% in 2020, 2.4% in 2021 and 2.7% in 2022. After 
expanding by 3.7% in 2018, euro area foreign demand is expected to slow to 0.7% in 2019, before 
increasing gradually to 1.0% in 2020, 2.3% in 2021 and 2.6% in 2022. Compared with the September 
2019 projections, it has been revised down by 0.3 percentage points in 2019, 0.9 percentage points in 
2020 and 0.4 percentage points in 2021. In addition to the impact of the tariffs announced after the 
cut-off date for the September 2019 projections and weaker data outturns, these revisions also reflect 
a broad-based weakness in the import momentum across both advanced and emerging economies 
on the back of a subdued growth outlook. 

Export growth is projected to be subdued in the near term and to gradually 
recover over the rest of the projection horizon. Following low rates of growth in the 
second and the third quarters of 2019, exports are projected to remain weak in the 
final months of 2019, consistent with the persisting slowdown in global trade. In the 
medium term, euro area exports are projected to recover and to grow broadly in line 
with foreign demand (see Box 2). Following a strong outturn in the second quarter of 
2019 (related to a spike in investment growth in Ireland) and moderate growth in the 
third quarter, imports are expected to grow broadly in line with total demand (domestic 
demand plus exports) over the projection horizon. Overall, the contribution of net trade 
to real GDP growth is projected to be broadly neutral over the entire projection horizon. 

Employment growth is projected to be subdued, partially reflecting temporary 
factors in the short term, while labour supply constraints are expected to 
emerge later in the horizon. Headcount employment grew by 0.1% in the third 
quarter of 2019, indicating a slowing of momentum compared with the quarterly 
growth rates seen in the past four years. Employment growth is projected to remain 
rather subdued over the medium term, owing to labour supply constraints. In addition, 
towards the end of the projection horizon, labour demand is also projected to 
moderate in line with the slowdown in activity.   

Eurosystem staff macroeconomic projections for the euro area, December 2019 

9 

 
 
 
  
  
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 (including 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 expected to increase, as older cohorts leave the workforce in higher 
numbers than younger cohorts enter it. 

The euro area unemployment rate is expected to decline steadily to 7.1% in 
2022. The unemployment rate declined to 7.5% in October 2019, which is the lowest 
level observed since 2008. Unemployment rates are expected to continue to exhibit 
substantial differences across euro area countries. 

Labour productivity growth is projected to recover over the projection horizon. 
Following its strong momentum in 2017, per worker and per hour labour productivity 
growth declined in 2018, reflecting the unexpected weakening of activity. Productivity 
growth will also be muted in 2019, owing to weak output growth but still fairly robust 
employment growth. Over the remainder of the horizon, productivity growth is 
expected to pick up, as activity regains momentum, while labour input growth slows 
down. Over the medium term, year-on-year labour productivity growth should 
converge towards its pre-crisis average of 1.0%.4   

Compared with the September 2019 projections, real GDP growth has been 
revised down in 2020, while it is unrevised for 2021. Growth in 2020 has been 
revised down as the impact of the sizeable downward revisions to foreign demand is 
only partially offset by the impact of more supportive fiscal and monetary policies, and 
an effective depreciation of the euro. In 2021 the impact of a more limited further 
downward revision to foreign demand is balanced by more supportive policies.   

Box 3 
Cross-country and cross-sector spillovers in the euro area 

Two concomitant developments have shaped economic growth in the euro area since the 
beginning of 2018: (i) a weakening in global trade, also in the light of rising trade tensions and 
persistent global policy uncertainty and (ii) a decoupling between the manufacturing and 
services sectors. Manufacturing activity, as reflected in the Purchasing Managers’ Index (PMI) (see 
Chart A), has since early 2018 been severely affected by the decline in global trade as well as by 
some adverse domestic factors, particularly related to the German car industry. 5  Activity in the 
services sector as a whole has thus far remained relatively resilient, although recent survey-based 
indicators point to some weakness in services.   

4    The average between 1999 and 2007. 
5    See “Domestic versus foreign factors behind the fall in euro area industrial production”, Issue 6, 

Economic Bulletin, ECB, 2019. 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

10 

 
 
 
                                                                    
Chart A 
Euro area PMI indicators 

(diffusion index, 50 = no change) 

Manufacturing output
Manufacturing employment

Services output
Services employment

62

60

58

56

54

52

50

48

46

01/18

03/18

05/18

07/18

09/18

11/18

01/19

03/19

05/19

07/19

09/19

11/19

Sources: Markit. 
Note: The latest observation is November 2019. 

Model results suggest that global factors have been the key reason for the weakness in the 
manufacturing output PMI across the large euro area countries since January 2018 (see Chart 
B).6  Adverse shocks specific to the euro area manufacturing sector have also contributed to the fall in 
the manufacturing output PMI indicators. 

Services have also been somewhat negatively affected by global and domestic factors but 
have exhibited more resilience (see Chart B). The services output PMI has also declined since 
January 2018, albeit to a much lesser extent than the manufacturing output PMI. The model results 
suggest that global factors were also the key contributor to the decline in services output PMI, 
although their impact was less pronounced than in the manufacturing sector. Euro area 
manufacturing shocks played a limited role for the decline in the services output PMI. 

6    The relative importance of foreign and domestic shocks in explaining the manufacturing and services 

output PMI indicators is assessed using a structural vector autoregression (SVAR) model. The exercise 
uses the manufacturing output PMI and the services output PMI for France, Germany, Italy and Spain, as 
well as the euro area PMI for new export orders. The model is estimated over the period January 2007 to 
October 2019. The identification of the shocks is based on the absolute magnitude restriction method: a 
shock in the home country has, at impact, a larger effect in absolute value on home variables than on 
foreign variables. In addition, it is assumed that the spillover from trade to manufacturing always has a 
positive sign. The identification method is explained in De Santis, R. A. and Zimic, S., “Spillovers among 
sovereign debt markets: Identification through absolute magnitude restrictions”, Journal of Applied 
Econometrics, Vol. 33, pp. 727-747, 2018. 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

11 

 
 
                                                                    
 
Chart B 
Drivers of euro area countries’ manufacturing and services PMI – domestic versus foreign factors 

(difference in the diffusion index) 

Due to global factors
Due to services in DE, FR, IT, ES
Due to manufacturing in DE, FR, IT, ES
Trend
Change in PMI between January 2018 and October 2019

5

0

-5

-10

-15

-20

MAN

DE

MAN

FR

MAN

IT

MAN

ES

SER

DE

SER

FR

SER

IT

SER

ES

Sources: Markit and ECB calculations. 
Note: Shocks are identified using the absolute magnitude restrictions method (De Santis, R. A. and Zimic, S., “Spillovers among sovereign debt markets: 
Identification through absolute magnitude restrictions”, Journal of Applied Econometrics, Vol. 33, pp. 727-747, 2018). “MAN” stands for manufacturing and “SER” 
for services. The latest observation is October 2019. 

In sum, the results suggest that there have been some negative spillovers from global factors 
and from manufacturing to services, although the services sector as a whole has so far 
remained relatively resilient. This likely reflects the fact that the current adverse shocks are 
associated with trade in goods and the car sector and are thus manufacturing sector-specific, while at 
the same time activity in all sectors has been cushioned by favourable financing conditions reflecting 
the highly accommodative stance of monetary policy. 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

12 

 
 
 
 
2 

Prices and costs 

HICP inflation is expected to decline to 1.1% in 2020 and then rise to 1.4% in 
2021 and 1.6% in 2022 (see Chart 2). Headline inflation rates are likely to be 
moderate but somewhat volatile until the second quarter of 2020, mainly reflecting 
base effects in HICP energy inflation. Until the beginning of 2021, HICP energy 
inflation will remain negative and turn positive only in the second quarter of 2021 as 
the oil price futures curve stabilises and some tax increases also take effect. HICP 
food inflation is envisaged to hover around 1.8%. After a moderate rise by end-2019, 
HICP inflation excluding energy and food will move sideways in the course of 2020 
and increase to 1.4% in 2021 and 1.6% in 2022. The upward path of HICP inflation 
excluding energy and food is expected to be supported by strengthening economic 
activity, by relatively robust wage growth amid tight labour markets, and by recovering 
profit margins as activity regains pace, aided, among other things, by the ECB’s 
September 2019 monetary policy measures. Rising non-energy commodity prices are 
also expected to provide some support to HICP inflation excluding energy and food.   

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

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

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. 

After easing in the second half of 2019, growth in compensation per employee 
is projected to gradually gain momentum as labour markets remain tight. The 
main driver of 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 be expected to contribute to robust wage growth in 
euro area countries where the wage formation process includes backward-looking 
elements. In addition, some countries have introduced increases in minimum wages 
that might pass through to the wage distribution.   

Eurosystem staff macroeconomic projections for the euro area, December 2019 

13 

 
 
 
 
Growth in unit labour costs is projected to decrease until the beginning of 2021 
and move sideways thereafter. Following a spike in 2019 in the context of the 
cyclical slowdown in productivity, unit labour cost growth is expected to moderate in 
the course of 2020 and stay at 1.4% thereafter. The slowdown in unit labour cost 
growth in 2020 reflects a pick-up in productivity growth against the background of flat 
wage growth, while the subsequent flat profile denotes a continued rise in productivity 
growth combined with a pick-up in wage growth. 

After contracting in 2019, profit margins are expected to continue declining in 
2020 before recovering slightly over the remainder of the projection horizon. 
Profit margins have been squeezed since mid-2018 and are expected to remain 
compressed in the course of 2020 owing to the weakening of economic activity, in 
particular in the manufacturing sector. In this environment, they are buffering the 
productivity-related acceleration in unit labour costs. In addition, past increases in oil 
prices have weighed on the terms of trade, adversely affecting profit margin 
developments. These factors should become less important as oil prices stabilise and 
economic activity regains pace, with past increases in wages gradually being passed 
on to prices.   

Following a slowdown in the course of 2019, external price pressures are 
expected to rise moderately until 2021 and to be stable thereafter. The annual 
growth rate of the import deflator is estimated to have decreased in 2019 and is 
expected to rise gradually in 2020 and 2021. This profile is largely determined by 
movements in oil prices, which have pushed down import prices in 2019 and, as 
suggested by the oil futures curve, will continue to dampen them somewhat over the 
projection horizon, but to a notably lesser extent. Rising non-oil commodity prices and 
underlying global price pressures should provide support for import price inflation.     

Compared with the September 2019 exercise, the projection for HICP inflation 
has been revised up for 2020 and down for 2021. These revisions are partly 
explained by the energy component, which has been revised upwards in 2020 but 
downwards in 2021, owing to higher oil prices in the short term and a slightly more 
downward-sloping oil price futures curve. Food price inflation has also been revised 
down for 2020 and 2021, partly reflecting lower inflation for international food 
commodity prices. The projection for HICP inflation excluding food and energy has 
been revised slightly up in 2020 and slightly down in 2021, reflecting the interplay 
between, on the one hand, upward pressures from a weaker exchange rate and the 
indirect effects of higher oil prices, and, on the other, weaker global prices and a lower 
path for wages and profit margins.   

Eurosystem staff macroeconomic projections for the euro area, December 2019 

14 

 
 
3 

Fiscal outlook 

The euro area fiscal stance 7  is assessed to be expansionary over 2019-21 and 
broadly neutral in 2022. The projected loosening of the fiscal stance over 2019-21 
mostly stems from cuts in direct taxes and higher government transfers, and to some 
extent from higher government investment and consumption. In 2022 the fiscal stance 
is projected to be broadly neutral, with some limited further direct tax cuts and 
additional expenditure. 

The euro area budget balance is projected to decline steadily over 2019-21 and 
to stabilise in 2022, while the debt ratio remains on a downward path. The 
decline in the budget balance over 2019-21 stems from the expansionary fiscal 
stance. This is partly compensated by lower interest expenditure, while the cyclical 
component remains unchanged over the projection horizon. The declining 
government debt ratio over the projection horizon is supported by the favourable 
interest rate-growth differential and by the primary surplus, although the latter is 
diminishing over time.   

The euro area fiscal outlook for 2020-21 has deteriorated somewhat compared 
with the September 2019 projections. Following a limited upward revision in 2019, 
the higher budget deficit in 2020 and 2021 reflects the additional fiscal loosening, 
while the cyclical component and the interest payment projections remain broadly 
unchanged. The debt ratio is projected to be on a slightly higher path than in the 
September 2019 projections, on account of upward revisions in the historical data, 
lower projected primary surpluses and less favourable interest rate-growth 
differentials over 2020-21. 

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, 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 57 by the end of 2022. Two alternative paths of the oil price are analysed. The first is 
based on the 25th percentile of the distribution provided by the option-implied densities for the oil 

7    The fiscal policy stance is measured as the change in the cyclically adjusted primary balance net of 

government support to the financial sector.   

Eurosystem staff macroeconomic projections for the euro area, December 2019 

15 

 
 
 
                                                                    
price on 19 November 2019. This path implies a gradual decrease of the oil price to USD 46.7 per 
barrel in 2022, which is 18.1% 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 2021), while HICP inflation would be 0.4 
percentage points lower in 2020, 0.3 percentage points lower in 2021 and 0.2 percentage points 
lower in 2022. The second path is based on the 75th percentile of the same distribution and implies an 
increase of the oil price to USD 78.7 per barrel in 2022, which is 38.1% above the baseline 
assumption for that year. This path would entail HICP inflation being higher by 0.7 percentage points 
in 2020, 0.6 percentage points in 2021 and 0.3 percentage points in 2022, while real GDP growth 
would be slightly lower (by 0.1 percentage points in 2020, 2021 and 2022). 

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 November 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 2022, which is 12.8% 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 0.2 percentage points lower in 2020, 0.4-0.5 percentage points 
lower in 2021 and 0.2-0.3 percentage points lower in 2022.   

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).   

The staff projections for real GDP growth and HICP inflation are within the range of forecasts 
from other institutions and private sector forecasters. 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

16 

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

(annual percentage changes) 

Date of release 

2019 

2020 

2021 

2022 

2019 

2020 

2021 

2022 

GDP growth 

HICP inflation 

Eurosystem projections 

December 2019 

1.2 

1.1 

1.4 

1.4 

1.2 

1.1 

1.4 

1.6 

OECD 

November 2019 

Euro Zone Barometer 

November 2019 

Consensus Economics   

November 2019 

European Commission 

November 2019 

Survey of Professional 
Forecasters 

October 2019 

[1.1 - 1.3] 

[0.5 - 1.7] 

[0.5 - 2.3] 

[0.4 - 2.4] 

[1.2 - 1.2] 

[0.6 - 1.6] 

[0.7 - 2.1] 

[0.8 - 2.4] 

1.2 

1.1 

1.1 

1.1 

1.1 

1.1 

0.9 

1.0 

1.2 

1.0 

1.2 

1.2 

1.1 

1.2 

1.3 

- 

1.3 

1.3 

- 

- 

1.2 

1.2 

1.2 

1.2 

1.2 

1.1 

1.2 

1.2 

1.2 

1.2 

1.4 

1.5 

1.5 

1.3 

1.4 

- 

1.6 

1.7 

- 

- 

IMF 

October 2019 

1.2 

1.4 

1.4 

1.4 

1.2 

1.4 

1.5 

1.7 

Sources: OECD Economic Outlook, November 2019; MJEconomics for the Euro Zone Barometer, November 2019 survey for 2019 and 2020, October 2019 
survey for 2021 and 2022; Consensus Economics Forecasts, November 2019 survey for 2019 and 2020, October 2019 survey for 2021 and 2022; European 
Commission Economic Forecast, Autumn 2019 Economic Forecast; ECB Survey of Professional Forecasters, 2019 Q4; IMF World Economic Outlook, October 
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. 

Eurosystem staff macroeconomic projections for the euro area, December 2019 

17 

 
 
 
 
  
  
© 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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