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The European economy is set for its seventh consecutive year of growth in 2019, with all Member States' economies due to expand. Growth in the euro area was stronger than expected in the first quarter of the year due to a number of temporary factors such as mild winter conditions and a rebound in car sales. It also benefited from fiscal policy measures, which boosted household disposable income in several Member States. The near-term outlook for the European economy, however, is clouded by external factors including global trade tensions and significant policy uncertainty. These have continued 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 the year.
As a result, the forecast for euro area GDP growth in 2019 remains unchanged at 1.2%, while the forecast for 2020 has been lowered slightly to 1.4% following the more moderate pace expected in the rest of this year (spring forecast: 1.5%). The GDP forecast for the EU remains unchanged at 1.4% in 2019 and 1.6% in 2020.
Domestic demand driving growth in the EU
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).
Lower inflation expected as oil prices fall
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).
Downside risks have increased
Risks to the global economic outlook 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.
European Economic Forecast. Summer 2019