BofA slashes forecast for 2020 euro area growth

Economists at BoFA Securities slashed their forecast for economic growth in the single currency bloc in 2020 on the back of the impact of the Chinese coronavirus.

Growth in the euro area was now seen coming in at just 0.6% in 2020, down from a prior estimate of 1.0%, although their forecast for the pace of expansion in 2021 was unchanged at 1.1%, implying "a permanent loss in activity".

Underpinning their projections - to a degree - were expectations of "small and late" fiscal responses on the part of authorities to buttress growth.

However, they cautioned "against hopes for swift or meaningful [European Central Bank] action".

"At EURUSD around 1.08 in spite of three Fed cuts being priced and increasing ECB talk of "side effects", we find another depo rate cut counter-intuitive," they explained, saying that the ECB cannot be "the [only] game in town".

Indeed, neither fiscal or monetary stimulus could avoid weakness in the fronthalf of the year, to the extent that it was "to a very large extent" supply-side driven, but it could help drive a recovery in demand once the supply shoch passed they explained.

It would also limit the permanent damage to activity levels.

"Uncertainty over length and intensity of disruptions globally and in Europe is high, and risks are very one-sided," they said.

"They require improving external demand, no large disruptions in Europe and resolution by late spring, so that tourism distortions fade by the summer.

"[...] The forecast assumes China gradually returns to work in the coming weeks and there are sporadic outbreaks outside China, triggering strong quarantining measures and further pressure on confidence. Despite a second half recovery, there will be some permanent damage."