Forget the ongoing trade war and China’s slowing growth — Deutsche Bank thinks “the biggest risk to the global economy comes from Europe.”
“Data has stabilised in some areas, e.g. with France’s activity improving as the ‘yellow vest’ protests fade, [but] other areas show weakness,” David Folkerts-Landau, group chief economist at Deutsche Bank, wrote in a major “House View” note sent to clients on Tuesday.
“The German manufacturing sector is flirting with recession and the Italian economy is in outright contraction. The ECB is unlikely to shift policy substantively in the near-term, leaving the economy fragile and exposed.”
Deutsche Bank expects GDP growth of just 0.9% in 2019. As a result of this fragility, Deutsche Bank fears that a shock such as an escalation of the trade war between the US and China or a disorderly no-deal Brexit could tip Europe into recession.
“Growth continues to remain low and the cycle is vulnerable,” Deutsche Bank wrote.
The bank also thinks that the political apparatus of the EU will be weakened after the upcoming European elections in May.
“Anti-establishment parties will gain seats in upcoming elections, potentially undermining effective economic policymaking and exacerbating the difficulty of choosing the next European Commission President,” analysts wrote.
Despite fears about Europe, Deutsche Bank’s economics team were generally optimistic about the state of the world in 2019.
“After a turbulent winter, there are tentative signs of green shoots in the global economy,” Folkerts-Landau wrote.
He argued that the worst is over for Chinese growth and the mood music coming out of US-China trade talks is promising, suggesting a deal could soon be reached.
Deutsche Bank said in its House View note it favours US equities and expects the economy to grow by 3.4% this year, which would be a slowdown from the 3.7% growth in 2018 estimated by the IMF.
It expects one interest hike from the Federal Reserve in the US in September, then another in 2020. It expects no change from the ECB until the end of next year and one rate hike from the Bank of England in August.
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.