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(BRUSSELS) – The economy in Europe will continue a resilient recovery, according to the EU’s winter forecast, but uncertainty from the U.S. and from Brexit is likely to muddy choppy waters.
In its winter forecast released on Monday, the European Commission expects euro area GDP growth of 1.6% in 2017 and 1.8% in 2018 – revised slightly higher from the Autumn Forecast (2017: 1.5%, 2018: 1.7%) on the back of better-than-expected performance in the second half of 2016 and a rather robust start into 2017. GDP growth in the EU as a whole is expected to follow a similar pattern, forecast at 1.8% this year and next (Autumn Forecast: 2017: 1.6%, 2018: 1.8%).
Real GDP in the eurozone has now grown for the fifth consecutive year, while employment is growing at a robust pace and unemployment continues to fall, although it remains above pre-crisis levels. The report shows that private consumption remains the engine of Europe’s recovery. While investment growth continues, it remains subdued.
The EU executive stresses however that risks to the projections are “exceptionally large” and that the overall balance remains tilted to the downside.
“The European economy has proven resilient to the numerous shocks it has experienced over the past year”, said the EU’s Finance Commissioner Pierre Moscovici. However, with the high levels of uncertainty, he warned that “it’s more important than ever that we use all policy tools to support growth. Above all, we must ensure that its benefits are felt in all parts of the euro area and all segments of society.”
On the global front, growth prospects for advanced economies outside the EU have improved over recent months, largely due to expectations of fiscal stimulus in the United States, which have resulted in higher long-term interest rates and an appreciation of the US dollar. Growth in emerging market economies is also set to firm up to 2018, although to varying degrees across countries and regions. Overall, the Commission thinks this could give a boost to European exports of both goods and services, following a weak 2016.
Inflation in the eurozone has recently picked up as the past drop of energy prices has recently given way to an increase. Having been very low over the past two years, inflation is now set to reach higher levels this year and next, though still short of the target of “below, but close to 2% over the medium term” defined as price stability. Core inflation, which excludes volatile energy and food prices, is set to rise only gradually. Overall, inflation in the euro area is expected to increase from 0.2% in 2016 to 1.7% in 2017 and 1.4% in 2018. In the EU, inflation is forecast to rise from 0.3% in 2016 to 1.8% in 2017 and 1.7% in 2018.
Investment is set to continue growing but only moderately, supported by a number of factors such as very low financing costs and strengthening global activity. Projects financed under the Investment Plan for Europe should increasingly support private and public investment as they move from approval to implementation. Overall, investment in the euro area is forecast to grow by 2.9% this year and by 3.4% in 2018 (2.9% and 3.1% in the EU), up 8.2% by now since the start of the recovery in early 2013. However, the share of investment in GDP remains below its value at the turn of the century (20% in 2016 compared to 22% in 2000-2005). This persistent weakness in investment casts doubt over the sustainability of the recovery and the economy’s potential growth.
The economic recovery continues to have strong positive effects on labour markets, following extensive structural reforms in several Member States. Employment growth is projected to remain relatively solid, albeit slightly less dynamic in 2017 and 2018 than last year. The unemployment rate in the euro area is forecast to decline further, from 10.0% in 2016 to 9.6% this year and 9.1% in 2018. In the EU as a whole, unemployment is expected to fall from 8.5% in 2016 to 8.1% this year and to 7.8% in 2018. These are the lowest unemployment figures since 2009 but remain above pre-crisis levels.
The aggregate euro area public deficit and the government debt-to-GDP ratio are expected to fall further in 2017 and 2018. The public deficit for the euro area is expected to decline from 1.7% of GDP last year to 1.4% in 2017 and 2018. This decline reflects lower interest spending due to exceptionally low interest rates. It also reflects further improvements in the labour market: more people are paying taxes and contributions, and fewer are receiving social transfers. The debt-to-GDP ratio is expected to diminish gradually from 91.5% in 2016 to 90.4% in 2017 and 89.2% in 2018.
The “exceptional risks” that surround the forecast are due to the “still-to-be-clarified intentions of the new administration of the United States in key policy areas”, says the Commission, as well as key elections to be held in Europe this year, and the upcoming “Article 50” negotiations with the UK.
In the short term, the forecast suggests that fiscal stimulus in the United States could have a stronger impact on growth than currently expected. In the medium term, risks to the growth outlook stem from legacies of the recent crises; the UK’s vote to leave the European Union; potential disruptions to trade; faster monetary tightening in the United States, which could have a negative influence on emerging market economies; and the potential consequences of high and rising debt in China.
