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Global tensions and uncertainty test EU economy

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Global tensions and uncertainty test EU economy

Pierre Moscovici - Photo EC

(BRUSSELS) - While Europe's economy is set for continued growth in 2019, the near-term outlook is clouded by global trade tensions and significant policy uncertainty, according to the EU's Summer 2019 Economic Forecast.

The forecast, published Wednesday by the European Commission, finds these external factors continue to weigh on confidence in the manufacturing sector, which is the most exposed to international trade, and are projected to weaken the growth outlook for the remainder of this year.

"The European economy continues to expand against a difficult global backdrop," said Economic Affairs Commissioner Pierre Moscovici: "All EU countries are set to grow again in both 2019 and 2020, with the strong labour market supporting demand."

However he warned that with the numerous risks to the outlook, the EU needed to "intensify efforts to further strengthen the resilience of our economies and of the euro area as a whole."

 

According to the forecast, while growth earlier this year benefited from a number of temporary factors, the outlook for the rest of the year looks weaker as prospects for a quick rebound in global manufacturing and trade have dimmed. GDP growth in 2020 is forecast to be higher, partly due to a higher number of working days. Domestic demand, particularly household consumption, continues to drive economic growth in Europe helped by the continued strength in the labour market. GDP is forecast to grow in all EU Member States this year and next but growth will be significantly stronger in some areas (e.g. Central and Eastern Europe, Malta, and Ireland) than in others (e.g. Italy, Germany).

On inflation, the forecasts for headline inflation in the euro area and the EU have been lowered by 0.1 percentage points this year and next, mainly due to lower oil prices and the slightly weaker economic outlook. Inflation (Harmonised Index of Consumer Prices) in the euro area is now forecast to average 1.3% in both 2019 and 2020 (spring forecast: 1.4% in 2019 and 2020), while in the EU it is forecast to average 1.5% in 2019 and 1.6% in 2020 (spring forecast: 1.6% in 2019 and 1.7% in 2020).

Pointing to risks to the global economic outlook, the forecast says these remain highly interconnected and are mainly negative. An extended economic confrontation between the US and China, together with the elevated uncertainty around US trade policy could prolong the current downturn in global trade and manufacturing and affect other regions and sectors. This could have negative repercussions for the global economy including through financial market disruptions. Tensions in the Middle East also raise the potential for significant oil price increases. Domestically, Brexit remains a major source of uncertainty. Finally, there are also significant risks surrounding near-term growth drivers and economic momentum in the euro area. Weakness in the manufacturing sector, if it were to endure, and depressed business confidence, could spill over to other sectors and harm labour market conditions, private consumption and ultimately growth.

Concerning the process of Britain's withdrawal from the EU, the report says projections for 2019 and 2020 are based on a purely technical assumption of status quo in terms of trading patterns between the EU27 and the UK. This is for forecasting purposes only and has no bearing on future negotiations between the EU and the UK.

Summer 2019 Economic Forecast: full document


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