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Trade tensions with US hitting EU growth

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Trade tensions with US hitting EU growth

Pierre Moscovici - Photo EC

(BRUSSELS) - Growth is set to remain strong in 2018 and 2019, at 2.1 per cent this year and 2 per cent next year, according to the EU's latest economic forecast, but growing trade tensions with the US could hit growth.

The European Commission's 'Summer 2018 Interim Economic Forecast' also shows that, after five consecutive quarters of vigorous expansion, the economic momentum moderated in the first half of 2018 and is now set to be 0.2 percentage points lower in both the EU and the euro area than had been projected in the spring.

Growth momentum is expected to strengthen somewhat in the second half of this year, as labour market conditions improve, household debt declines, consumer confidence remains high and monetary policy remains supportive.

"The slight downward revision compared to the spring reflects the impact on confidence of trade tensions and policy uncertainty, as well as rising energy prices," said the EU's Financial Affairs Commissioner Pierre Moscovici: " Our forecast is for a continued expansion in 2018 and 2019, although a further escalation of protectionist measures is a clear downside risk." "Trade wars produce no winners, only casualties," he added.

The fundamental conditions for sustained economic growth in the EU and the euro area remain in place, according to the EU executive. The moderation in growth rates is partly the result of temporary factors, but rising trade tensions, higher oil prices and political uncertainty in some Member States may also have played a role.

Globally, growth remains solid but rates are becoming more differentiated across countries and regions.

As a result of the rise in oil prices since the spring, inflation this year is now forecast to average 1.9% in the EU and 1.7% in the euro area. This represents an increase of 0.2 percentage points in both areas since spring. The forecast for 2019 has been raised by 0.1 percentage points for the euro area to 1.7% but remains unchanged at 1.8% for the EU.

On the risk factors, the interim forecast says that while the recent strong economic performance has proven to be resilient, the forecast remains susceptible to significant downside risks, which have increased since spring.

The forecast baseline assumes no further escalation of trade tensions. Should tensions rise, however, they would negatively affect trade and investment and reduce welfare in all countries involved. Other risks include the potential for financial market volatility linked to, inter alia, geopolitical risks.

Regarding the UK, the report says that given the ongoing negotiations on the terms of the UK withdrawal from the EU, 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 under way in the context of the Article 50 process.

The interim forecasts cover annual and quarterly GDP and inflation for the current and following year for all Member States and the euro area, as well as EU aggregates.

Full document: Summer 2018 Interim Economic Forecast


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