## ch1 - 1.4 percent in 2019—the lowest growth rate since

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### Summary
- Regional growth is projected at 1.4 percent in 2019—the lowest rate since 2013—and to rebound to 1.8 percent in 2020.
- Forecasts are broadly unchanged from the April 2019 World Economic Outlook but mask differences across country groups and notable revisions.

### Trade and manufacturing slowdown: causes and recent developments
- Global export volumes slowed significantly from about 4½ percent in 2017 to close to zero in the first half of 2019.
- Industrial production is expanding at a rate less than half of its early 2018 peak.
- The slowdown began in early 2018 and has been driven by:
  - Slower capital expenditure in Asia.
  - Sluggish production in the vehicle and technology sectors.
  - Intensified trade tensions and Brexit-related uncertainty.
- European exports stalled in the first half of 2019 after decelerating in 2018; weakness is pronounced in intermediate goods, implying supply-chain spillovers.
- The slowdown in Europe’s exports has mainly stemmed from softening exports of machinery and transport equipment, and other manufactured goods.
- Car production remains particularly weak in Germany; it has held up in some Central European producers (Czech Republic, Hungary, Slovak Republic).

### Recent macro outcomes across subregions
- Advanced Europe:
  - Growth slowed in the first half of 2019 despite an uptick in Q1 from Brexit-related stockpiling and one-off factors.
  - Net exports continued to be a drag on growth.
  - Fixed investment slowing has begun to weigh on activity in several advanced European countries.
- Emerging Europe (excluding Russia and Turkey):
  - Growth held up in the first half of 2019 thanks to robust private consumption driven by strong labor markets, higher absorption of EU funds, and resilient services exports (Hungary, Poland).
- Russia:
  - Growth remained modest reflecting weaker domestic demand and sluggish investment.
- Turkey:
  - Growth resumed, buoyed by expansionary fiscal policy and rapid credit expansion by state-owned banks.
- External balances:
  - External surpluses declined slightly in some advanced economies (Germany, Netherlands) but remain high.
  - In NMS and several Southeastern European non-EU countries, domestic demand led to small current account deteriorations; market shares generally held up well.
  - Turkey saw a sharp current account improvement mainly on import compression.
  - Russia’s current account weakened on lower oil prices.

### Outlook and projections (exact figures preserved)
- Europe’s real GDP growth:
  - 2019: 1.4 percent
  - 2020: 1.8 percent
- Advanced Europe:
  - 2019: 1.3 percent
  - 2020: 1.5 percent
  - Projections downgraded by 0.1 percentage point in both 2019 and 2020.
- Emerging Europe:
  - 2019: 1.8 percent
  - 2020: 2.5 percent
  - Growth projections revised up by 0.5 and 0.2 percentage point in 2019 and 2020, respectively.
- Turkey:
  - 2019: 0.2 percent
  - 2020: 3.0 percent
  - Large upward revisions reflect better-than-expected outturn in H1 2019.
- Russia:
  - 2019: 1.1 percent
  - 2020: 1.9 percent (assuming planned national projects are implemented effectively).
- Other emerging European economies:
  - 2019: 3.7 percent
  - 2020: 3.1 percent
- Revisions:
  - Advanced Europe: downgraded by 0.1 percentage point both in 2019 and 2020.
  - Emerging Europe: revised up by 0.5 and 0.2 percentage point in 2019 and 2020, respectively.
  - Russia: one of the largest downward revisions for 2019 due to weak H1 2019 outturns and softening domestic demand and export growth.

### Inflation outlook (exact figures preserved)
- Advanced Europe:
  - 2018: 1.8 percent
  - 2019: 1.4 percent
  - 2020: 1.5 percent
  - Downward revision of 0.1 percentage point in both 2019 and 2020.
- Emerging Europe:
  - 2018: 6.3 percent
  - 2019: 6.9 percent
  - 2020: 5.7 percent
  - Downward revisions of 0.3 and 0.5 percentage point for 2019 and 2020 are largely driven by Turkey in 2019 and Russia in 2020.
- Turkey:
  - 2019 inflation forecast revised down by 1.8 percentage points due to more favorable market sentiment and lira stability; inflation remains well above target.
- Russia:
  - Inflation moderated to close to the target as earlier shocks dissipate; expected to be below the target at end-2019 and in 2020.

### Risks to the outlook (including quantified scenarios)
- Overall risk stance: Amid high uncertainty, risks to the forecasts are to the downside.
- Brexit:
  - A no-deal Brexit could reduce output by about 3½ percent in the United Kingdom and by ½ percent in the European Union in two years relative to the April 2019 forecast.
  - Value added trade exposure of European countries to the United Kingdom is sizable, though smaller than exposure to Germany.
- Trade tensions escalation and tighter financing conditions can weigh significantly on European investment and growth.
- Potential for the manufacturing and trade weakness to spread to services, possibly faster and more extensively than expected.
- Other risks:
  - Abrupt declines in risk appetite.
  - Build-up of financial vulnerabilities.
  - Re-emergence of deflationary pressures in advanced economies.
  - Country-specific domestic weakness, geopolitical tensions.
  - Delays in structural reforms, demographic challenges, climate change, rising inequality, declining trust in mainstream policies—all could dampen medium- to long-term growth.

### Policy priorities and recommendations
- Monetary policy:
  - Should remain accommodative where inflationary pressures are still subdued (the case in most European economies).
  - In advanced Europe, monetary policy should continue to support gradual upward adjustment of inflation toward policy objectives.
  - In Russia, monetary policy loosening could be considered given contained inflation as inflationary pressures ease.
  - In Romania and Turkey, monetary policy should be kept tight to contain inflationary pressures and strengthen policy credibility.
  - Most other emerging European countries can keep monetary policy accommodative for now.
  - Prolonged loose monetary policy necessitates heightened monitoring of financial sector vulnerabilities and targeted macroprudential measures as needed.
  - In the euro area and other countries with negative interest rates, monitor impacts on traditional financial sector operations, profitability, and asset prices.
  - Example recommendation for Turkey: a comprehensive third-party assessment of bank balance sheets and stress tests with follow-up measures as needed.
- Financial sector resilience:
  - Continue implementation of new financial sector regulations and reduction of nonperforming loans to strengthen sector resilience.
  - Closely watch pockets of vulnerabilities and address them with targeted macroprudential measures.
- Fiscal policy:
  - Fiscal stance should remain anchored by countries’ medium-term objectives while allowing automatic stabilizers to operate.
  - Countries with ample fiscal space and human capital or infrastructure needs (Germany, Netherlands) should consider a measured fiscal expansion to boost potential output and reduce external surpluses.
  - Positive spillovers from fiscal expansion to less cyclically strong economies would be welcome.
  - Countries with still-elevated public debt and deficits should pursue fiscal consolidation to reduce vulnerabilities, except where private demand is so weak that consolidation would push output growth far below potential.
  - All countries should consider debt management operations that reduce refinancing risks and mitigate rollover vulnerabilities.
- Structural policy:
  - Reinvigorating structural reforms remains vital to raise subdued potential output growth and address long-term challenges, such as demographics.

### Policy stance and preparedness
- If significant negative risks materialize, given limited monetary policy space, the fiscal stance will need to be more expansionary, while keeping in mind medium-term debt sustainability objectives.
- Countries with a high deficit and public debt could consider a temporarily slower pace of fiscal consolidation or a temporary expansion, as long as debt sustainability is secured and market confidence is not undermined.
- Policymakers should prepare contingency plans focusing on growth-friendly and inclusive policies that deliver support in a timely manner.
- A synchronized fiscal response, albeit appropriately differentiated across countries, could become suitable.
- Structural reforms remain essential to raise potential output, boost resilience, and strengthen inclusive growth.
  - Product market reforms could improve competitiveness and increase productivity.
  - Policies to increase labor force participation rates and enhance human capital (including shifting taxes away from labor, enhancing apprenticeship programs, and improving tailoring education to labor market needs) should be urgently implemented.
  - Completing the euro area’s architecture is critical to increase its resilience to shocks.
  - The European Union would benefit from deepening the single market for services.
  - In many emerging European countries, strengthening governance and improving public sector efficiency remain imperative to sustain continued and equitable convergence of living standards to advanced European levels.

### Vehicle sector slowdown — key findings
- The vehicle sector is important in many European countries for both the domestic economy and exports.
  - In Germany—Europe’s largest vehicle producer—vehicles constitute about 20 percent of manufacturing and about 17 percent of exports.
  - In the Slovak Republic, the vehicle sector comprises about one-third of manufacturing and more than a quarter of exports.
- Europe’s vehicle production has fallen and has been one of the main contributors to the industrial production slump in the European Union (EU).
- Structural and cyclical factors behind the slowdown include:
  - tighter EU emission standards;
  - a shift in preferences from diesel toward gasoline and other alternative fuel vehicles;
  - weakening global demand, especially from China.
- After the emissions-related dip in 2018, car registrations—a demand indicator—have normalized.
- Germany led the 2018 vehicle production contraction, with production remaining weak in the first half of 2019, dropping by about 12 percent versus the first half of 2018.
- Vehicle production held up in Central and Eastern Europe (CEE); anecdotal evidence attributes CEE’s relative robustness to the types of cars produced (such as SUVs and utilitarian cars) and the ability of CEE suppliers to adapt and re-orient to other models and plants outside of Germany.
- Potential reorganizations of supply chains—related to the shift to alternative fuel vehicles—pose considerable uncertainty to the medium-term outlook.
- A sustained weakness in the vehicle sector could spill over to the broader economy and across borders via supply chains.

### Near-term outlook and risks
- The near-term outlook for Europe remains conservative on the back of falling demand for diesel cars, trade tensions, Brexit-related uncertainty, and additional tighter emission standards.
- Potential negative scenario: synchronized weakness in vehicle production and broader manufacturing could transmit across countries through supply chains, amplifying regional slowdown.

### Selected key statistics from annex tables
- GDP Growth (Year-over-year percent change) — selected rows
  - Europe: 2.3 1.4 1.8 1.9 1.3 1.8 1.8 0.1 0.0 0.0
  - Advanced European Economies: 2.0 1.3 1.5 1.6 1.4 1.6 1.6 0.1 0.0 0.0
  - Euro Area: 1.9 1.2 1.4 1.4 1.3 1.5 1.5 0.1 0.0 0.0
  - Emerging European Economies: 3.1 1.8 2.5 2.5 1.2 2.3 2.4 0.5 0.2 0.1
  - Central Europe: 5.1 4.1 3.1 2.7 3.7 3.0 2.7 0.4 0.1 0.0
  - World (memorandum): 3.6 3.0 3.4 3.6 3.3 3.6 3.6 0.3 0.2 0.1
- Headline Inflation (Year-over-year percent change) — selected rows
  - Europe: 3.3 3.1 2.8 2.9 3.3 3.1 3.1 0.1 0.3 0.1
  - Advanced European Economies: 1.8 1.4 1.5 1.6 1.4 1.6 1.7 0.1 0.2 0.1
  - Euro Area: 1.8 1.2 1.4 1.5 1.3 1.6 1.7 0.1 0.2 0.2
  - Emerging European Economies: 6.3 6.9 5.7 5.7 7.2 6.2 5.8 0.3 0.5 0.1
  - Central Europe: 1.9 2.6 3.5 3.4 2.2 2.1 2.2 0.4 0.1 0.3
  - World (memorandum): 3.6 3.4 3.6 3.5 3.6 3.6 3.5 0.2 0.2 0.1

*International Monetary Fund | November 2019*

### 1.4 percent in 2019—the lowest growth rate since

### ch1 - 1.4 percent in 2019—the lowest growth rate since

### Summary
- Regional growth is projected at 1.4 percent in 2019—the lowest rate since 2013—and to rebound to 1.8 percent in 2020.
- Forecasts are broadly unchanged from the April 2019 World Economic Outlook but mask differences across country groups and notable revisions.

### Trade and manufacturing slowdown: causes and recent developments
- Global export volumes slowed significantly from about 4½ percent in 2017 to close to zero in the first half of 2019.
- Industrial production is expanding at a rate less than half of its early 2018 peak.
- The slowdown began in early 2018 and has been driven by:
  - Slower capital expenditure in Asia.
  - Sluggish production in the vehicle and technology sectors.
  - Intensified trade tensions and Brexit-related uncertainty.
- European exports, both within and outside the region, stalled in the first half of 2019 after decelerating in 2018; weakness is pronounced in intermediate goods, implying spillovers into supply chains.
- The slowdown in Europe’s exports has mainly stemmed from softening exports of machinery and transport equipment, and other manufactured goods.
- Car production remains particularly weak in Germany; it has held up in some Central European producers (Czech Republic, Hungary, Slovak Republic).

### Recent macro outcomes across subregions
- Advanced Europe:
  - Growth slowed in the first half of 2019 despite an uptick in Q1 from Brexit-related stockpiling and one-off factors.
  - Net exports continued to be a drag on growth.
  - Fixed investment slowing has begun to weigh on activity in several advanced European countries.
- Emerging Europe (excluding Russia and Turkey):
  - Growth held up in the first half of 2019 thanks to robust private consumption driven by strong labor markets, higher absorption of EU funds, and resilient services exports (Hungary, Poland).
- Russia:
  - Growth remained modest reflecting weaker domestic demand and sluggish investment.
- Turkey:
  - Growth resumed, buoyed by expansionary fiscal policy and rapid credit expansion by state-owned banks.
- External balances:
  - External surpluses declined slightly in some advanced economies (Germany, Netherlands) but remain high.
  - In NMS and several Southeastern European non-EU countries, domestic demand led to small current account deteriorations; market shares generally held up well.
  - Turkey saw a sharp current account improvement mainly on import compression.
  - Russia’s current account weakened on lower oil prices.

### Outlook and projections (exact figures preserved)
- Europe’s real GDP growth:
  - 2019: 1.4 percent
  - 2020: 1.8 percent
- Advanced Europe:
  - 2019: 1.3 percent
  - 2020: 1.5 percent
  - Projections downgraded by 0.1 percentage point in both 2019 and 2020.
- Emerging Europe:
  - 2019: 1.8 percent
  - 2020: 2.5 percent
  - Growth projections revised up by 0.5 and 0.2 percentage point in 2019 and 2020, respectively.
- Turkey:
  - 2019: 0.2 percent
  - 2020: 3.0 percent
  - Large upward revisions reflect better-than-expected outturn in H1 2019.
- Russia:
  - 2019: 1.1 percent
  - 2020: 1.9 percent (assuming planned national projects are implemented effectively).
- Other emerging European economies:
  - 2019: 3.7 percent
  - 2020: 3.1 percent
- Revisions:
  - Advanced Europe: downgraded by 0.1 percentage point both in 2019 and 2020.
  - Emerging Europe: revised up by 0.5 and 0.2 percentage point in 2019 and 2020, respectively.
  - Russia: one of the largest downward revisions for 2019 due to weak H1 2019 outturns and softening domestic demand and export growth.

### Inflation outlook (exact figures preserved)
- Advanced Europe:
  - 2018: 1.8 percent
  - 2019: 1.4 percent
  - 2020: 1.5 percent
  - Downward revision of 0.1 percentage point in both 2019 and 2020.
- Emerging Europe:
  - 2018: 6.3 percent
  - 2019: 6.9 percent
  - 2020: 5.7 percent
  - Downward revisions of 0.3 and 0.5 percentage point for 2019 and 2020 are largely driven by Turkey in 2019 and Russia in 2020.
- Turkey:
  - 2019 inflation forecast revised down by 1.8 percentage points due to more favorable market sentiment and lira stability; inflation remains well above target.
- Russia:
  - Inflation moderated to close to the target as earlier shocks dissipate; expected to be below the target at end-2019 and in 2020.

### Risks to the outlook (including quantified scenarios)
- Overall risk stance: Amid high uncertainty, risks to the forecasts are to the downside.
- Brexit:
  - A no-deal Brexit could reduce output by about 3½ percent in the United Kingdom and by ½ percent in the European Union in two years relative to the April 2019 forecast.
  - Value added trade exposure of European countries to the United Kingdom is sizable, though smaller than exposure to Germany.
- Trade tensions escalation and tighter financing conditions can weigh significantly on European investment and growth.
- Potential for the manufacturing and trade weakness to spread to services, possibly faster and more extensively than expected.
- Other risks:
  - Abrupt declines in risk appetite.
  - Build-up of financial vulnerabilities.
  - Re-emergence of deflationary pressures in advanced economies.
  - Country-specific domestic weakness, geopolitical tensions.
  - Delays in structural reforms, demographic challenges, climate change, rising inequality, declining trust in mainstream policies—all could dampen medium- to long-term growth.

### Policy priorities and recommendations
- Monetary policy:
  - Should remain accommodative where inflationary pressures are still subdued (the case in most European economies).
  - In advanced Europe, monetary policy should continue to support gradual upward adjustment of inflation toward policy objectives.
  - In Russia, monetary policy loosening could be considered given contained inflation as inflationary pressures ease.
  - In Romania and Turkey, monetary policy should be kept tight to contain inflationary pressures and strengthen policy credibility.
  - Most other emerging European countries can keep monetary policy accommodative for now.
  - Prolonged loose monetary policy necessitates heightened monitoring of financial sector vulnerabilities and targeted macroprudential measures as needed.
  - In the euro area and other countries with negative interest rates, monitor impacts on traditional financial sector operations, profitability, and asset prices.
  - Example recommendation for Turkey: a comprehensive third-party assessment of bank balance sheets and stress tests with follow-up measures as needed.
- Financial sector resilience:
  - Continue implementation of new financial sector regulations and reduction of nonperforming loans to strengthen sector resilience.
  - Closely watch pockets of vulnerabilities and address them with targeted macroprudential measures.
- Fiscal policy:
  - Fiscal stance should remain anchored by countries’ medium-term objectives while allowing automatic stabilizers to operate.
  - Countries with ample fiscal space and human capital or infrastructure needs (Germany, Netherlands) should consider a measured fiscal expansion to boost potential output and reduce external surpluses.
  - Positive spillovers from fiscal expansion to less cyclically strong economies would be welcome.
  - Countries with still-elevated public debt and deficits should pursue fiscal consolidation to reduce vulnerabilities, except where private demand is so weak that consolidation would push output growth far below potential.
  - All countries should consider debt management operations that reduce refinancing risks and mitigate rollover vulnerabilities.
- Structural policy:
  - Reinvigorating structural reforms remains vital to raise subdued potential output growth and address long-term challenges, such as demographics.

*This chapter reflects data and developments as of October 25, 2019.*

### 1. FACING SpILLOvERS FROM TRAdE ANd MANUFACTURING

### 1. FACING SpILLOvERS FROM TRAdE ANd MANUFACTURING

### Policy stance and preparedness
- If significant negative risks materialize, given limited monetary policy space, the fiscal stance will need to be more expansionary, while keeping in mind medium-term debt sustainability objectives.
- Countries with a high deficit and public debt could consider a temporarily slower pace of fiscal consolidation or a temporary expansion, as long as debt sustainability is secured and market confidence is not undermined.
- Policymakers should prepare contingency plans focusing on growth-friendly and inclusive policies that deliver support in a timely manner.
- A synchronized fiscal response, albeit appropriately differentiated across countries, could become suitable.
- Structural reforms remain essential to raise potential output, boost resilience, and strengthen inclusive growth.
  - Product market reforms could improve competitiveness and increase productivity.
  - Policies to increase labor force participation rates and enhance human capital (including shifting taxes away from labor, enhancing apprenticeship programs, and improving tailoring education to labor market needs) should be urgently implemented.
  - Completing the euro area’s architecture is critical to increase its resilience to shocks.
  - The European Union would benefit from deepening the single market for services.
  - In many emerging European countries, strengthening governance and improving public sector efficiency remain imperative to sustain continued and equitable convergence of living standards to advanced European levels.

### Vehicle sector slowdown — key findings
- The vehicle sector is important in many European countries for both the domestic economy and exports.
  - In Germany—Europe’s largest vehicle producer—vehicles constitute about 20 percent of manufacturing and about 17 percent of exports.
  - In the Slovak Republic, the vehicle sector comprises about one-third of manufacturing and more than a quarter of exports.
- Europe’s vehicle production has fallen and has been one of the main contributors to the industrial production slump in the European Union (EU).
- Structural and cyclical factors behind the slowdown include:
  - tighter EU emission standards;
  - a shift in preferences from diesel toward gasoline and other alternative fuel vehicles;
  - weakening global demand, especially from China.
- After the emissions-related dip in 2018, car registrations—a demand indicator—have normalized.
- Germany led the 2018 vehicle production contraction, with production remaining weak in the first half of 2019, dropping by about 12 percent versus the first half of 2018.
- Vehicle production held up in Central and Eastern Europe (CEE); anecdotal evidence attributes CEE’s relative robustness to the types of cars produced (such as SUVs and utilitarian cars) and the ability of CEE suppliers to adapt and re-orient to other models and plants outside of Germany.
- Potential reorganizations of supply chains—related to the shift to alternative fuel vehicles—pose considerable uncertainty to the medium-term outlook.
- A sustained weakness in the vehicle sector could spill over to the broader economy and across borders via supply chains.

### Near-term outlook and risks
- The near-term outlook for Europe remains conservative on the back of falling demand for diesel cars, trade tensions, Brexit-related uncertainty, and additional tighter emission standards.
- Potential negative scenario: synchronized weakness in vehicle production and broader manufacturing could transmit across countries through supply chains, amplifying regional slowdown.

### Selected key statistics from annex tables

- GDP Growth (Year-over-year percent change) — selected rows
  - Europe: 2.3 1.4 1.8 1.9 1.3 1.8 1.8 0.1 0.0 0.0
  - Advanced European Economies: 2.0 1.3 1.5 1.6 1.4 1.6 1.6 0.1 0.0 0.0
  - Euro Area: 1.9 1.2 1.4 1.4 1.3 1.5 1.5 0.1 0.0 0.0
  - Emerging European Economies: 3.1 1.8 2.5 2.5 1.2 2.3 2.4 0.5 0.2 0.1
  - Central Europe: 5.1 4.1 3.1 2.7 3.7 3.0 2.7 0.4 0.1 0.0
  - World (memorandum): 3.6 3.0 3.4 3.6 3.3 3.6 3.6 0.3 0.2 0.1

- Headline Inflation (Year-over-year percent change) — selected rows
  - Europe: 3.3 3.1 2.8 2.9 3.3 3.1 3.1 0.1 0.3 0.1
  - Advanced European Economies: 1.8 1.4 1.5 1.6 1.4 1.6 1.7 0.1 0.2 0.1
  - Euro Area: 1.8 1.2 1.4 1.5 1.3 1.6 1.7 0.1 0.2 0.2
  - Emerging European Economies: 6.3 6.9 5.7 5.7 7.2 6.2 5.8 0.3 0.5 0.1
  - Central Europe: 1.9 2.6 3.5 3.4 2.2 2.1 2.2 0.4 0.1 0.3
  - World (memorandum): 3.6 3.4 3.6 3.5 3.6 3.6 3.5 0.2 0.2 0.1

*International Monetary Fund | November 2019*

---


_Source: https://www.imf.org/-/media/files/publications/reo/eur/2019/november/english/ch1.pdf_