The recent slowdown in global growth and world trade, together with high uncertainty about trade policies, is weighing on prospects for Gross Domestic Product (GDP) growth in 2019 and 2020. The continued weakness of the manufacturing sector also plays a role, especially in those countries encountering specific problems in the automobile industry.
Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: “The European economy is showing resilience in the face of a less favourable external environment, including trade tensions. Growth is set to continue in all EU Member States and pick up next year, supported by robust domestic demand, steady employment gains and low financing costs. Yet risks to the outlook remain pronounced. On the external side, these include further escalation of trade conflicts and weakness in emerging markets, in particular China. In Europe, we should stay alert to a possible ‘no-deal Brexit', political uncertainty and a possible return of the sovereign-bank loop.”
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said:“The European economy will continue to grow in 2019 and 2020. Growth remains positive in all our Member States and we continue to see good news on the jobs front, including rising wages. This means that the European economy is holding up in the face of less favourable global circumstances and persistent uncertainty. Nonetheless, we should stand ready to provide more support to the economy if needed, together with further growth-enhancing reforms. Above all, we must avoid a lapse into protectionism, which would only exacerbate the existing social and economic tensions in our societies.”
GDP slowdown to bottom out in 2019
As global trade and growth are expected to remain weaker this year and next compared to the brisk pace seen in 2017, economic growth in Europe will rely entirely on domestic activity. More Europeans are now in work than ever and employment growth is expected to continue, albeit at a slower pace. This, together with rising wages, muted inflation, favourable financing conditions and supportive fiscal measures in some Member States, is expected to buoy domestic demand. All in all, GDP is forecast to grow by 1.4% in the EU this year and 1.2% in the euro area.
In 2020, adverse domestic factors are expected to fade and economic activity outside the EU to rebound, supported by easing global financial conditions and policy stimulus in some emerging economies. GDP growth next year is forecast to strengthen slightly to 1.6% in the EU and 1.5% in the euro area. The figures for 2020 also benefit from a higher number of working days that year.
Unemployment continues to fall
Labour market conditions continued to improve despite the slowdown in growth towards the end of 2018. While still too high in certain Member States, unemployment in the EU - at 6.4% in March 2019 - has fallen to the lowest rate recorded since the start of the monthly data series in January 2000. Unemployment in the euro area is currently at the lowest rate since 2008.
Over the next two years, the rate of employment growth is expected to slow as the impact of more moderate growth takes its toll and temporary fiscal measures in some Member States fade. The unemployment rate is expected to continue to fall in the EU in 2019 and is set to reach 6.2% in 2020. The unemployment rate in the euro area is forecast to fall to 7.7% in 2019 and to 7.3% in 2020, lower than it was before the crisis began in 2007.
Inflation to remain subdued
Inflation in the EU is expected to fall to 1.6% this year before rising to 1.7% in 2020. Euro area headline inflation dropped from 1.9% in the last quarter of 2018 to 1.4% in the first quarter of this year due to lower increases of energy prices. With energy price inflation expected to moderate further in the coming quarters and little sign that higher wage growth has been fuelling underlying price pressures, euro area inflation (Harmonised Index of Consumer Prices) is forecast to reach 1.4% in both 2019 and 2020.
Public debt to continue falling despite lower growth
Debt-to-GDP ratios are forecast to fall in most Member States in 2019 and 2020 as deficits remain low and nominal GDP growth should remain higher than the average interest rate on outstanding debt. Assuming no policy change, the debt-to-GDP ratio of the EU is forecast to fall from 81.5% in 2018 to 80.2% in 2019 and 78.8% in 2020. The euro area's aggregate debt-to-GDP ratio should fall from 87.1% in 2018 to 85.8% in 2019 and 84.3% in 2020.
The aggregate government deficit of the EU is expected to rise from 0.6% of GDP in 2018 to 1% in both 2019 and 2020. It is also expected to rise in the euro area, from 0.5% of GDP in 2018 to 0.9% in 2019 and to remain unchanged in 2020, assuming no policy change. The increase this year is mainly due to slower GDP growth and expansionary fiscal policies in some Member States.
Risks to the outlook remain prominent
Downside risks to the outlook remain prominent. The risk of protectionist measures worldwide and the current slowdown in world GDP growth and trade could turn out to be more persistent than expected, particularly if growth in China disappoints. In Europe, risks include that of a ‘no-deal' Brexit and the possibility that temporary disruptions currently weighing on manufacturing could prove more enduring. There is also the risk that a rise in political uncertainty and less growth-friendly policies could result in a pull-back in private investment.
On the positive side, private consumption and investment in the EU could prove more resilient than expected, particularly if confidence among business and consumers was less sensitive to uncertainty and domestic headwinds, and if it were accompanied by stronger-than-assumed fiscal policy measures in countries with fiscal space and growth-enhancing reforms. [...]
Spring 2019 Economic Forecast
Commissioner Moscovici's remarks presenting the Spring 2019 Economic Forecast
[...]Euro area headline inflation declined from 1.9% in the last quarter of 2018 to 1.4% in the first quarter of 2019, pulled down mainly by lower increases in energy prices. The higher rate seen in April was principally the result of calendar effects and is expected to have been temporary. Energy prices are expected to moderate further in the coming quarters.
Overall, euro area headline inflation is now forecast at quite low level of 1.4% in both 2019 and 2020.
It is worth repeating important messages, so let me say this again: every Member State's economy is expected to continue growing over this year and next, albeit at a slower pace.
In 2019, among the largest EU economies, GDP growth in 2019 is expected to be above the EU average of 1.4% in Poland at 4.2%, in Spain at 2.1% and in the Netherlands at 1.6%.
GDP growth in Germany is forecast to be particularly subdued this year at 0.5%, largely due to the weakness in manufacturing and particularly in the car industry. The German economy which is very dependent on exports, has also been particularly hit by the slowdown in external demand. However, we expect growth to recover to 1.5% next year, in line with the average for the euro area. [...]
In Spain GDP growth is forecast at 2.1% this year and 1.9% next year. Slowly moderating private demand should be offset by a gradual rise in the contribution of net exports to growth.
Italy slipped into a mild contraction in the second half of last year, as the slowdown of global trade and weak manufacturing spread to the domestic economy.It is expected to grow only by 0.1% this year, picking up to 0.7% in 2020.
In the UK, prospects remain relatively subdued. Growth is forecast at 1.3% in both 2019 and 2020. Uncertainty over the future relationship with the EU27 is set to continue weighing on investment. Let me stress that these forecasts are based on a purely technical assumption of an unchanged trading relationship with the EU27.
Central and eastern European Member States are expected to decouple to some extent from the weaker momentum in the larger EU economies.
Finally, let me make an oft-neglected point, concerning the growth performance in the five euro area countries that had financial assistance programmes during the crisis – Greece, Ireland, Portugal, Spain and Cyprus. The average growth rate in these Member States in the period 2018-2020 is forecast at 2.8%, compared to a euro area average of 1.5%. This is not to minimise the economic and social challenges still faced in some of these countries, but to show that the reforms undertaken appear to be bearing fruit. Getting out of the programme means also getting out of austerity, and getting back to growth and job creation.
The euro area's general government deficit declined last year to its lowest level since 2000: 0.5% of GDP. This year we are expecting it to increase to 0.9% of GDP in 2019 and to stabilise in 2020. In the EU as a whole, the deficit is projected to increase from 0.6% of GDP in 2018 to 1% in 2019 and 2020.
The rise in the deficit this year is due to lower GDP growth but also to expansionary fiscal policies in some Member States. As a consequence, compared to last year the fiscal stance for the euro area is expected to turn slightly expansionary in 2019 and 2020.
Debt-to-GDP ratios are projected to continue falling, supported by debt-decreasing primary surpluses as well as nominal GDP growth remaining higher than the average interest rate on outstanding debt.
The euro area debt-to-GDP ratio is set to fall from 87.1% in 2018 to 84.3% in 2020.
In the EU 28, it is set to fall from 81.5% in 2018 to 78.8% in 2020. [...]
On the external side we are still seeing a worrying amount of uncertainty surrounding trade disputes. Further disruptions in the multilateral trade order could hit our export-oriented economies.
Should the global soft patch turn out to be more persistent, worsening investor confidence could lead to deteriorating financing conditions.
On the positive side, domestic demand might turn out to be more resilient than we expect.
Finally, discretionary policy measures could provide a bigger than expected boost to economic activity.
Overall, the European economy is proving resilient in the face of less favourable global circumstances and persistent uncertainty. Growth remains positive in all Member States and we continue to see good news on the jobs front, also in terms of rising wages. Nonetheless, we should stand ready to provide more support if needed, together with further growth-enhancing reforms. Above all, we must avoid a lapse into protectionism and inward-looking policies which would only exacerbate the existing social and economic tensions in our societies and we know they are very strong right now.
Full speech
Related article on Bloomberg: EU Cuts German Growth Outlook, Sees ‘Pronounced’ Euro-Area Risks
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