EU economic forecast
After a 10-year high for the euro area and the UE27 in terms of GDP growth in 2017, the European Commission expects the European economy to move into a lower gear during the next 3 years. In addition, many interrelated risks are clouding the outlook even further.
Recently, the European Commission published its annual “Autumn Economic Forecast[1]” for the European economy and its member states. Pierre Moscovici, European Commissioner for Economic and Financial Affairs, presented the economic outlook and explained in more detail the underlying assumptions of the Commission’s assessment regarding the domestic and international growth dynamics until 2020.
Although the EU economy and its member states are expected to enjoy another period of uninterrupted growth over the forecast horizon 2018-2020, the Commission's report suggests that economic growth has peaked in 2017 (+2,6% and +2,4% GDP growth for the EU27 and the euro area respectively) and now is set to continue at a slower pace. More precisely, euro area GDP growth is estimated to fall to +2,1% in 2018, before easing further to +1,9% and +1,7% in 2019 and 2020 respectively. According to the European Commission, these less dynamic prospects are mainly a result of an expected deterioration of the external demand, as some emerging market economies experience growing economic difficulties and international calls for de-escalation of trade tensions enjoy insufficient attention.
Domestic demand to be the main driver of growth
Considering this expected lack of contribution of global trade to economic growth, the Commission thus expects domestic demand to be the main driver of growth in Europe over the forecast horizon. In other words, private consumption growth should support economic growth thanks to encouraging labour market developments which are generally set to continue in Europe, while investment is also projected to remain robust, despite the BCE’s recent announcements regarding the upcoming gradual normalization of monetary policy in the euro area. According to the Commission, these growth drivers should be strong enough to allow debt-to-GDP ratios to fall in almost all member states, while unemployment rates are also expected to drop below levels not seen since the years before the financial crisis of 2007-2008.
With less support expected from the external environment as international trade is projected to lose some dynamism, the growth prospects of export oriented countries are thus more likely to be affected. As a result, the Commission significantly lowered its growth predictions for the German economy, as GDP growth in Germany seems to moderate significantly to levels similar to those estimated for Belgium and France until 2020.
Luxembourg’s projected growth rates to be taken with caution
As a small open economy with strong trade and financial links in international markets, Luxembourg is also no exception in this regard and remains vulnerable to weakening global activity and trade tensions. As far as growth predictions are concerned, the Commission expects GDP growth to average +3,1% in 2018 before easing to only +3% and +2,7% in 2019 and 2020 respectively. However, the Commission’s report also indicates that these projected growth rates need to be taken with caution, as Luxembourg’s national accounts data has frequently been subject of substantial revisions in recent years. At the end of 2016 for instance, the Commission expected the Grand-Duchy to grow at a rate of +3,6%, while revisions operated by STATEC later on suggested the Luxembourgish economy had only grown by +2,4% that year. Similarly, during October this year, significant revisions to national accounts data suggested Luxembourg’s economy had only grown by +1,5% in 2017, while the Commission’s report in Autumn last year revealed an estimated growth rate of +3,4%.
Domestic and international risks are clouding the outlook
Additionally, the underlying hypotheses of the Commission’s forecast cast further doubt on the projected growth rates for the EU economy and its member states, as Pierre Moscovici himself indicated that these predictions should be considered as “rather optimistic” given the high number of economic risks the EU is currently exposed to.
Internationally, a high level of uncertainty is first of all linked to economic developments and trade policies in the US. Under the central scenario, the forecast in fact assumes the absence of a further escalation of trade disputes beyond the measures already adopted and firmly announced. Furthermore, the Commission expects GDP growth in the US to moderate progressively from +2,9% this year to only +1,9% in 2020, which would slow down the rapid pace of monetary tightening in the US and thus lead to less financial turmoil and more financial stability in advanced as well as emerging market economies.
Regarding domestic risks, it also needs to be mentioned that the forecast is based on the hypothesis of a “soft Brexit”, thus assuming that the British Parliament will approve Theresa May’s Brexit deal. Furthermore, sovereign-bank loops could also re-emerge in some high-debt euro area countries (most notably Italy) in case of continuing doubts regarding the sustainability of public finances, which could as a result raise more concerns related to financial stability in the euro area and thus weigh on economic activity.
Finally, the Commission’s report indicates that the materialization of any of these risks could potentially amplify the others, which underlines the interrelated nature of the numerous risks clouding the economic outlook for the EU economy and its member states.
[1] For more information : https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-forecasts/autumn-2018-economic-forecast_de