The outlook for the European economy has worsened dramatically as the export-dependent industrial sector has slumped in the face of collapsing global demand. Although falling inflation should boost households’ spending power, this may be limited by a further deterioration in labour market conditions. Meanwhile, there are still concerns over whether European policymakers will act as decisively as those elsewhere. We expect central banks throughout much of the region to cut interest rates towards zero this year. But the ECB, in particular, will take some time to get there and may find it harder to engage in unconventional monetary easing techniques. Meanwhile, fiscal stimulus packages are unlikely to match that soon to be implemented in the US. The upshot is that Europe now looks set to suffer just as heavily, if not more heavily, than the US.
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