The eurozone will enjoy stronger economy growth than previously thought this year and next but face risks from uncertainty surrounding Donald Trump’s presidency and the UK’s negotiations to leave the European Union, according to forecasts by the European commission.
The executive arm of the EU became the latest body to concede its predictions made shortly after the Brexit vote had been overly gloomy. It also upgraded its outlook for the UK this year.
After a stronger than expected close to 2016, it sees the UK economy growing 1.5% this year, compared with a forecast for just 1% growth made in November. That would still mark a significant slowdown from last year’s 2% growth.
The commission sees the UK economy losing further momentum in 2018, with growth of just 1.2%, unchanged from November’s forecast. Its forecasts follow the move by the Bank of England this month to raise its outlook for the UK economy this year. It sees GDP expanding 2.0% in 2017 and 1.6% in 2018.
Winter 2017 Economic Forecast | check all information (also by country) here: https://t.co/2c560Rv1yk #ECForecast pic.twitter.com/HrZXe0pKpq
— European Commission (@EU_Commission) February 13, 2017
The commission also pencilled in more upbeat prospects for the 19-state eurozone after a “better-than-expected performance in the second half of 2016 and a rather robust start into 2017”. It forecasts eurozone economic growth of 1.6% in 2017 and 1.8% in 2018, compared with 1.5% and 1.7%, respectively, in the previous set of forecasts three months ago.
The new forecast means the commission still expects growth in the eurozone to slow this year, from 1.7% in 2016. It said private consumption remained the “engine of the recovery” and that while investment growth continued it was still subdued. It was also keen to stress downside risks to its forecast.
“The particularly high uncertainty surrounding this winter forecast is due to the still-to-be-clarified intentions of the new administration of the United States in key policy areas, as well as the numerous elections to be held in Europe this year and the upcoming article 50 negotiations with the UK,” it said in the outlook.
The Brussels-based commission joined other forecasters in suggesting there could be a short-term boost to growth from Trump’s plans to cut US taxes and increase state spending.
In the medium term, however, it saw risks to growth in Europe from the Brexit vote, disruptions to trade, faster-than-expected interest rate rises in the US and the potential consequences of high debt in China.
But it also saw reasons to be positive about the state of the EU economy as it faced those potential challenges. For the first time in almost a decade, the economies of all EU member states were expected to grow throughout the forecasting period of 2016, 2017 and 2018.
The commission’s outlook for the jobs market was also mildly positive. Eurozone unemployment was expected to drop from 10.0% in 2016 to 9.6% this year and 9.1% in 2018.
The commission forecast eurozone inflation would increase from 0.2% in 2016 to 1.7% in 2017 and then ease back to 1.4% in 2018.
The European commission vice-president said the return of inflation should be taken by policymakers as a sign the European Central Bank could not keep interest rates ultra-low and continue to print electronic money indefinitely.
“With inflation picking up from low levels, we cannot expect current monetary stimulus to last forever. Therefore countries with high deficit and debt levels should continue bringing them down to become more resilient to economic shocks,” Valdis Dombrovskis said.
