Tuesday

21st Nov 2017

EU registers 'highest economic growth rate in 10 years'

  • "We have entered a new phase with a concrete impact on economic indicators," said EU commissioner Moscovici (Photo: European Commission)

The European Commission on Thursday (9 November) gave an optimistic view of the EU economy, saying that it is "on track to grow at its fastest pace in a decade this year."

According to the EU executive's Autumn Economic Forecasts, the eurozone economy will grow by 2.2 percent this year, 2.1 percent next year and at 1.9 percent in 2019.

In its previous forecasts in May, the Commission counted on only a 1.9 percent growth this year and next year.

For the whole EU, including non-eurozone countries, growth is expected to be a "robust" 2.3 percent this year and 1.9 percent next year - compared to 1.9 percent for both years that was expected in May.

"This is the highest growth rate in 10 years," said EU economic affairs commissioner Pierre Moscovici said at a press conference.

He pointed out that for the first time in a decade that all EU countries will grow this year.

"We have entered a new phase with a concrete impact on economic indicators," he said, adding that the effects were now "being felt by citizens".

'Atypical' recovery

Moscovici explained that the improved prospects were due to "resilient private consumption, stronger growth around the world, and falling unemployment". He added that the investment in the EU is "picking up" and that confidence in economy has "considerably brightened".

He noted however that the recovery is "atypical", as it is "dependent on policy support" - a reference to the European Central Bank policy of low interest rates and massive bond buying.

He also noted that the current growth cycle is characterised by "less output" than previous cycles, and that "a sluggish wage growth partly reflects low productivity growth and persistent slack in [the] labour market."

Outside Europe, international tensions as well as adjustments in the Chinese economy or possible protectionist measures by the US mean that the Commission cannot predict whether EU's economic situation will "turn out better or worse than forecast".

But for the first time, risks surrounding the economic outlook are "broadly balanced" instead of "tilted to the down side".

Internal developments could however derail the EU growth perspective.

"While market reactions to recent events in Catalonia have remained contained, the risk exists that future developments could have an impact on economic growth," the Commission noted in its reports, adding that the size of the impact "cannot be anticipated at this stage."

With a 3.1 percent growth this year, Spain is one of eurozone's most dynamic countries, and it should soon be able to exit the deficit procedure it has been under since 2009.

The Spanish deficit could fall to 3.1 percent of GDP this year, down from 4.5 percent in 2016, and the Commission expects it will continue to shrink to 2.4 percent in 2018 and 1.7 percent in 2019.

France and Italy

France, the other eurozone country under a deficit procedure, will also decrease its deficit, to 3 percent this year. Contrary to May's forecasts, the Commission now expects the French deficit to remain under 3 percent in 2018 - at 2.9 percent.

Moscovici, the French member of the Commission, said the decision over closing the procedure will be taken in spring 2018. He said it was "desirable and possible" but that France had only a "small room for manoeuvre" to ensure that result.

In its first forecasts report since Emmanuel Macron became French president, the Commission reckoned that "domestic risks are slightly tilted to the upside."

It said that "recent cost-competitiveness gains could help exporters to better absorb the euro's appreciation than in the past," and that "higher corporate investment could help boost potential growth, leading to self-fulfilling higher growth expectations."

But it noted that "deficit-increasing measures" such as a housing tax exemption and the replacement of the wealth tax by a tax on real estate wealth will be only "partially compensated".

The country with the lowest growth rate this year will be Italy - 1.5 percent - ahead of an uncertain electoral year. But Moscovici insisted that the country is "on the right track" even if it has to "continue efforts to strengthen its economic structures and make the necessary adjustments."

The Commission noted in its report that while public and private consumption are projected to decelerate, public and private investment is "set to pick up sizeably."

After the near collapse of the Monte dei Paschi di Siena bank threatened Italy's economy, the report also noted that "recent government actions to address acute risks in weaker banks could help unclog bank lending and further reduce downside risks, while structural reforms are expected to lift potential growth."

UK and Greece

The Commission noted the the prospect of Brexit "is already having an impact on economic activity" and insisted that its forecasts for 2019 where based "on a purely technical assumption of status quo in terms of trading relations between the EU-27 and the UK."

UK growth slowed down this year - to 1.5 percent from 2.3 percent in 2015 and 1.8 percent in 2016 - because higher prices led to lower consumption.

In the coming months and years, the Commission noted, "business investment is projected to remain subdued following a period of heightened uncertainty, while net export growth is forecast to moderate marginally, in line with export markets."

Greece is another country where the coming months will be crucial, with the end of the current bailout programme next summer.

The Commission revised downward its forecasts for Greek growth this year - to 1.6 percent, compared to a 2.1 percent forecasts in May.

The delay in closing the second review on the programme, earlier this year, is a "major explanation," Moscovici said, as consumption and investment were "hit more than we had expected" by uncertainty over negotiations between Athens and its creditors.

"My general message: let's not waste time," the commissioner added, as Greece is starting the bailout's third review and has to prepare to return on financial markets next year.

ECB slows down eurozone support scheme

Starting in January, the European Central Bank will reduce its emergency bond-buying programme from €60 billion to €30 billion a month.

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After the Paradise Papers brought new revelations about tax dodging across the globe, including in the EU, the European Parliament wonders how to step up the fight.

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