Thursday

19th Jan 2017

EU looking at long-term slow growth

  • Pierre Moscovici: "European growth will hold up in 2017 against a more challenging backdrop than in the spring" (Photo: European Commission)

"Modest growth in challenging times" with a pessimistic evaluation of future trends: the European Commission published on Wednesday (9 November) its Autumn Economic Forecasts under a very cautious headline.

Four months after the UK voted to leave the EU and on the day after the US elected Donald Trump as president, the EU executive revised upward its growth forecasts for this year but stressed global risks to the economy.

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"European growth will hold up in 2017 against a more challenging backdrop than in the spring," EU finance commissioner Pierre Moscovici said at a press conference.

The commission expects the euro area's GDP to grow by 1.7 percent this year, compared to a 1.6 percent forecast in the previous report in May. For the whole EU, it said growth would be 1.8 percent this year, compared to a 1.6-percent expectation in May.

Moscovici stressed "five good news": the GDP is growing in all 28 countries, mainly thanks to private consumption; unemployment is expected to fall more than previously thought, from 10.1 percent in 2016 to 9.2 percent 2018; investment is on the rise; inflation will reach 1.4 percent in 2017, from 0.3 percent this year ; and the EU deficit is down, from 2 percent this year to 1.7 next year.

'Vicious circle'

The commission has revised its forecasts for next year.

It says growth will be 1.5 percent in the euro area and 1.6 percent in the whole EU, while it said in May that is would be respectively 1.8 percent and 1.9 percent.

"Risks have intensified in recent months, mainly in the wake of the UK ‘leave’ vote," it explains, adding that "risks have increased on the external side, in particular of a disorderly adjustment in China and aggravating geopolitical conflicts."

In a reference to Tuesday's US election, the commission also points out "potential adverse policy shifts … and the related uncertainty" that could have an impact on US and world growth.

It notes a "new backlash against globalisation", of which Brexit was a consequence, and that has an impact on potential growth.

It says that "the new backlash against globalisation may further dampen already slow international trade growth … has increased policy uncertainty that in turn is likely to dampen domestic demand."

In a more unusual note, the report warns of a longer term risk for the EU economy.

"As expectations of low growth ahead affect investment today, there is potential for a vicious circle," the commission's director general for economic and financial affairs writes in the report's foreword.

"In short, the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent (hysteresis), " Marco Buti writes, using a word that refers to a situation of economical crisis and high unemployment that remains after its cause has disappeared.

Differing growth

Looking at the current modest growth, the commission notes that it "differs substantially across member states."

"In some, GDP now stands more than 10% above its trough, having passed the pre-crisis level some time ago. In others, the expansion from the trough is still modest, and GDP remains so far lower than at the onset of the crisis," it says, suggesting a risk of growing inequalities in the EU.

Among member states, Spain, which spent ten months without a proper government, is expected to record the fastest growth, with 3.2 percent in 2016 and 2.3 percent in 2017. Romania with 5.9 and 3.9 percent will be the EU28 most growing economy.

But Spain is expected to be the only country to miss the 3-percent deficit target next year, from 4.6 percent this year to 3.8 percent in 2017, instead of a 3.1-percent target set by the EU. A budget proposal to be sent soon will show whether the new government thinks it can meet the target.



France, where a presidential and legislative elections will take place next year, is expected to meet the target, with 2.9 percent, before falling again in 2018 with 3.1-percent deficit.

In Italy, another country under scrutiny from the commission, the deficit is expected to remain at 2.4 percent in 2016 and 2017 although the government has promised to cut to 1.8 percent next year.

As for Britain, the commission notes a "healthy" 1.9-percent this year despite the vote to leave the EU, above the EU average. But for 2017, it says that growth will fall to 1 percent, and 1.2 percent in 2018, "as business react to current uncertainty" around the Brexit talks, Moscovici said.

EU should raise own taxes, says report

A group chaired by former Italian PM and EU commissioner Mario Monti says Brexit should be used to create EU-level levies to depend less on member states contributions, and to abolish member states rebates in the EU budget.

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