Pierre Moscovici – Photo EC
(BRUSSELS) – The eurozone economy is set to grow at its fastest pace in a decade this year, the EU Commission forecast in its Autumn Economic Forecast Thursday, with real GDP growth substantially higher than expected.
Real GDP growth for the eurozone is forecast at 2.2 per cent, higher than the Spring Forecast of 1.7%. The EU economy as a whole is also set to beat expectations with robust growth of 2.3% this year (up from 1.9% in spring).
According to today’s Autumn Forecast, the European Commission expects growth to continue in both the euro area and in the EU at 2.1% in 2018 and at 1.9% in 2019 (Spring Forecast: 2018: 1.8% in the euro area, 1.9% in the EU).
Pierre Moscovici, the EU’s Commissioner for Financial Affairs, welcomed the “good news on many fronts, with more jobs being created, rising investment and strengthening public finances.” He warned however that challenges remained, in the form of high debt levels and subdued wage increases: “A determined effort from Member States is needed to ensure that this expansion will last and that its fruits are shared equitably. Moreover, structural convergence and the strengthening of the euro area are necessary to make it more resilient to future shocks and to turn it into a true motor of shared prosperity.”
The report reflects a European economy performing significantly better than expected this year, propelled by resilient private consumption, stronger growth around the world, and falling unemployment. Investment is also seen picking up amid favourable financing conditions and considerably brightened economic sentiment, as uncertainty fades. The economies of all EU Member States are seen to be expanding and their labour markets improving, but wages are rising only slowly.
Recovery remains incomplete, however, says the Commission, with still ‘significant slack’ in the labour market and untypically low wage growth.
On unemployment, the forecast finds job creation sustained and labour market conditions set to benefit from domestic-demand driven expansion, moderate wage growth, and structural reforms implemented in some Member States. Unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, as the total number of people employed climbs to a record high. Over the next two years, unemployment is set to decrease further to 8.5% in 2018 and 7.9% in 2019. In the EU, the unemployment rate is projected at 7.8% this year, 7.3% in 2018 and 7.0% in 2019. Job creation is expected to moderate, as temporary fiscal incentives fade in some countries and skill shortages emerge in others.
On inflation, the headline consumer price inflation rate has fluctuated over the first nine months of the year under the influence of energy base effects. Core inflation, which excludes energy and unprocessed food prices, by contrast, has been rising but remains subdued, reflecting the impact of a prolonged period of low inflation, weak wage growth as well as remaining labour market slack. Overall, inflation is expected to average 1.5% in the euro area this year and is expected to dip to 1.4% in 2018 before climbing up to 1.6% in 2019.
Public finances in the eurozone are forecast to improve more than was expected in the spring, mostly thanks to the pick-up in growth. The headline government balance is expected to improve in almost all Member States. Under a no-policy-change assumption, the euro area general government deficit-to-GDP ratio is expected to fall to 0.8% in 2019 (1.1% in 2017 and 0.9% in 2018), while the debt-to-GDP ratio is forecast to decline to 85.2% (89.3% in 2017 and 87.2% in 2018).
Risks are ‘broadly balanced’. Main downside risks are external, relating to elevated geopolitical tensions (e.g. on the Korean peninsula), possibly tighter global financial conditions (e.g. due to an increase of risk aversion), the economic adjustment in China or the extension of protectionist policies. In the European Union, downside risks relate to the outcome of the Brexit negotiations, a stronger appreciation of the euro, and higher long-term interest rates. On the other hand, diminishing uncertainty and improving sentiment in Europe could lead to stronger-than-forecast growth, as could stronger growth in the rest of the world.
Regarding the United Kingdom, given the ongoing negotiation on the terms of the UK withdrawal from the EU, the EU’s projections for 2019 are based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK. This is for forecasting purposes only and has no bearing on the talks underway in the context of the Article 50 process.
