Raises German GDP forecast to 1.1% for 2020, 2021 (previously 1.0%)

Cuts French 2020 GDP forecast to 1.1% (previously 1.3%), keeps 2021 forecast at 1.2%

The European economy continued to weather external headwinds in the second half of 2019 thanks to the strength of domestic drivers.

Growth in the euro area turned out better than expected in the third

quarter but disappointed at the end of the year.

Leading indicators suggest that manufacturing output may stabilise in the months to come, although an upturn is not yet on the cards.

However, with hints of a bottoming out in global trade flows, and as the dampening impact of domestic inventory adjustment fades, a trough may have been reached.

With continued real income gains, a supportive policy mix and a construction sector buoyed by low borrowing costs, the European economy is well placed to navigate the challenging external environment, high trade policy uncertainty and dampening structural factors.

This is, however, a fragile equilibrium, which could be easily derailed by unforeseen events.

Overall, the European economy remains on a path of steady and moderate growth.

Over the next two years, annual GDP growth in the euro area is expected to settle at 1.2%, the same as in 2019.

The outlook for 2020 and 2021 is unchanged since the autumn, as more positive developments are counterbalanced by negative events elsewhere.

On the back of supportive monetary policy, slightly higher oil price assumptions and some upward momentum in underlying price pressures, euro area headline inflation has been revised slightly upwards, to 1.3% in 2020 and 1.4% in 2021.