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Brexit, political uncertainty reel back EU growth forecasts

10 November 2016, 11:23 CET
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Brexit, political uncertainty reel back EU growth forecasts

Pierre Moscovici - Photo EC

(BRUSSELS) - The EU Commission trimmed its growth forecast for the European economy Wednesday, with political uncertainty, Brexit and weak global trade weighing on growth prospects.

According to the EU's Autumn 2016 Economic Forecast, GDP growth in the eurozone is expected to be 1.7% in 2016, 1.5% in 2017 and 1.7% in 2018 - the Spring forecast was 1.6% in 2016 and 1.8% in 2017. GDP growth in the EU as a whole is forecast at 1.8% this year, 1.6% in 2017 and 1.8% in 2018 (Spring forecast: 1.8% in 2016 and 1.9% for 2017).

Finance Commissioner Pierre Moscovici said European growth would hold up in 2017 against a more challenging backdrop than in the spring. He said he was encouraged by "the pace of job creation, boosted by recent reforms in many countries, decreasing public deficits in the euro area, a pick-up in investment and more dynamic EU-intra trade." However, in these "volatile and uncertain times, no effort must be spared to safeguard and strengthen this recovery – and ensure that all sections of society feel its benefits," he added.

Private consumption is set to remain the primary engine of growth through to 2018, supported by expectations for employment to continue growing and wages to pick up slightly. Borrowing costs remain supportive to growth due to exceptionally accommodative monetary policy.

The eurozone aggregate budget deficit is set to continue to edge down, while the fiscal stance is projected to remain non-restrictive. Investment is set to continue increasing.

Political uncertainty, slow growth outside the EU and weak global trade will weigh on growth prospects. There is also still a risk that the economy's weak performance in recent years could hold back growth, and persistent slack points to the possibility of faster growth without undue inflationary pressures.

There is also a warning that the European economy will no longer be able to rely on the exceptional support it has been receiving from external factors, such as falling oil prices and currency depreciation.

The investment climate is brightening, with investment expected to pick up in 2018. Overall investment is forecast to grow by 3.3% this year, 3.1% in 2017 and 3.5% in 2018.

Employment in the EU is expected to grow by 1.4% this year, faster than at any time since 2008.

Employment growth is forecast to remain relatively solid, though slightly moderating in 2017 and 2018. Unemployment in the eurozone is expected to decline relatively fast, from 10.1% in 2016 to 9.7% next year and 9.2% in 2018. The trend is expected to be the same for the EU as a whole, with unemployment set to fall from 8.6% this year to 8.3% next year and 7.9% in 2018. For the euro area, this is the lowest level since 2009. It compares to a 2013 peak of 12%, but remains well above the 7.5% low reached in 2007.

Eurozone inflation was very low in the first half of the year due to falling oil prices, but started to pick up in the third quarter as the impact of past price decreases began to wear off. Inflation should now climb moderately above 1%, as oil prices are assumed to rise. Core inflation, which excludes volatile energy and food prices, is expected to rise gradually amid higher wage growth and a further narrowing of the output gap. Overall, inflation in the euro area is expected to rise from 0.3% in 2016 to 1.4% in both 2017 and 2018. In the EU, inflation is forecast to rise from 0.3% this year to 1.6% in 2017 and 1.7% in 2018.

Both the aggregate public deficit and the government debt-to-GDP ratio of the euro area are expected to continue declining over the forecast horizon of 2017-2018. The public deficit for the euro area is expected to fall from 1.8% of GDP this year to 1.5% in both 2017 and 2018. This is a result of lower social transfers in line with falling unemployment, wage bill moderation in the public sector and low interest rates, which make debt-servicing cheaper. The debt-to-GDP ratio is expected to fall from 91.6% in 2016 to 89.4% in 2018.

Global GDP growth fell further in recent months and is now expected at 3.2% this year, its lowest since 2009. As growth in emerging markets and the United States is expected to strengthen, however, the global growth rate (excluding the EU) is expected to pick up modestly.

World trade, which has been exceptionally fragile this year, is expected to grow more slowly than GDP in 2016 before rising back in line with GDP growth in 2017 and exceeding it slightly in 2018. Imports are expected to grow faster than exports in the euro area. The euro area's current account surplus is forecast to decline over the forecast horizon.

Risks to the forecast have risen in recent months and are clearly tilted to the downside, including as a result of the UK 'leave' vote, which has raised uncertainty and can be seen as an indicator of heightened policy risks in the current volatile political environment. External risks, such as uncertain economic trends in China and the risk of aggravating geopolitical conflicts have also risen.

Autumn Economic Forecast - Website and #ecforecast

European Economic Forecast – explanatory website

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