Editor's note

International Internet Magazine. Baltic States news & analytics Monday, 16.07.2018, 13:36

Growth in Europe and the Baltic States

Eugene Eteris, BC, Riga/Copenhagen, 09.07.2018.Print version

The EU enjoyed strong growth of 2.4% in 2017, which is the highest in more than a decade. However, businesses are increasingly concerned about a fall in business confidence. Recent drop in confidence coincides with strong underlying factors, e.g. improving labour market conditions, a supportive global growth and relatively accommodative monetary policies.

Business federations in Europe are increasingly concerned about a shortage of relevant skills, which acts as a constraint on their growths. Risks to the outlook remain in particular in the form of a high level of policy uncertainty, with the danger of increasing protectionism. As outlined in studies from major international business institutions, a potential significant damage to European/global growth in the event of a full trade war is expected.


BusinessEurope expects a GDP growth in 2018 at 2.4% in the EU-27 and 2.3% in the Euro-19-states’ area; for 2019, it expects a slow-down in growth to 2.1% for both the EU and the Euro-area. Source: https://www.businesseurope.eu/sites/buseur/files/media/reports_and_studies/businesseurope_economic_outlook_spring_2018_-_final.pdf

 

Table1: Growth in the EU and the Baltics

 

                          Real GDP growth, %            Inflation, %                      Unemployment, %

 

 

2018

2019

2018

  2019

2018   Expected

2019

EU28

2.4

2.1

1.7

  1.9

 7.0 

6.6

Euro-area

2.3

2.1

1.5

  1.7

 8.3

7.8

Estonia

4.0

3.2

2.9

2.3

5.8

6.2

Latvia

4.0

3.4

2.8

2.4

8.0

7.7

Lithuania

3.2

2.7

2.9

2.6

6.5

6.2  

Source: https://www.businesseurope.eu/sites/buseur/files/media/reports_and_studies/businesseurope_economic_outlook_spring_2018_-_final.pdf

 

BusinessEurope’s recommendations

The European business federation sees the main risks in the form of a “high level” policy uncertainty, with the danger of increasing protectionism. For example, other international bodies, like IMF’s analysis suggests that a broader application of tariffs across countries could lower global output by about 1¾% after 5 years and by close to 2% in the long-term. The OECD is warning that “the threat of trade restrictions has begun to adversely affect confidence, and, if such measures were implemented, they would negatively influence investment and jobs.”


In order to boost long-term growth and competitiveness, policymakers must implement labour, product market and institutional reforms that would make EU states’ economies more productive and resilient. Policymakers should ensure that legal instruments are well designed and properly enforced, with a minimum of administrative burdens.


To address labour market mismatches, work-orientated learning for all age groups must be improved, including promoting digital skills, and reforms which help encourage people to stay longer in the workforce and ensure to properly integrate legal migrants into the workforce.

 

Table2. BusinessEurope’s main forecast

                                                                                EU-28                                 Euro area

Main variables                                            2018            2019              2018              2019

 Real GDP (annual % growth)                2.4 (+0.3)         2.1                2.3 (+0.3)          2.1

 Inflation (%)                                             1.7                 1.9                 1.5                     1.7

Unemployment (%)                                   7.0                 6.6                 8.3                     7.8

Government net lending (% of GDP)       -0.8               -0.8                -0.7                    -0.6

Gross public debt (% of GDP)                  81.2              79.7               87.3                   85.2

 

                                                                                   EU-28                             Euro area

GDP components                                            2018       2019                   2018      2019

Private consumption (%)                                    2.1          1.9                       1.9        1.8

Public consumption (%)                                     1.4           1.3                       1.2       1.3

Gross fixed capital formation (%)                     4.6          4.0                         5.1       4.2

Exports (%)                                                        4.5           4.2                       4.8        4.1                           

Imports (%)                                                        4.7           4.3                       4.9        4.4

Source: BusinessEurope’s forecast based on survey of member states’ federations

https://www.businesseurope.eu/sites/buseur/files/

 

Key drivers for growth  

A slight slowdown in consumer spending is regarded as a main single reason for a more moderate GDP growth during 2018; consumer spending is still expected to grow at a robust 2% during the whole year.  


Looking at the drivers of growth, consumer spending, the largest component of demand (according to Eurostat), has contributed slightly less to growth in 2017 than in previous years, e.g. by 0.2-0,3 percentage points in 2015.


BusinessEurope’s forecast has shown the following predictions:


= EU investment growth saw a strong pick-up in 2017. While investment growth is expected to see some further improvement in the coming months, it remains insufficient to swiftly close the pre-crisis investment gap. However, recent analysis by the IMF, says that key investment barriers, which threaten to hold back investment in the medium-term, remain, with the most pressing ones relating to the availability of skilled staff, future uncertainty and stringent business and labour market regulations. Of particular concern remains weak net investment, which takes into account capital depreciation. Net investment in the EU was estimated at only 3.4% of GDP in 2017; however, well below the pre-crisis period 1995-2008 average of 6.1%.

= Companies’ investment plans are supported by improved cost and access to finance Companies’ investment plans are also subject to the availability and cost of finance which have both improved over the recent years and are expected to remain supportive in the near future.

= Strong export growth to countries outside the EU in 2017, after a drop in extra-EU exports in 2016. Higher EU exports come along with a strong increase in global trade growth. Improved performance of extra-EU exports came along with a brightening of the global trading environment. After a period of relatively low global trade growth (at about 1.5% in 2016), global trade picked up strongly to about 5% during 2017.

 

Unemployment, inflation & public finances

While the recovery still remains incomplete, we already see the emergence of structural mismatches in labour markets. The strengthening of economic growth has led to a further improvement in labour markets.


EU’s unemployment amounted to 7.1% in mid-2018, the lowest rate since September 2008, marginally above the pre-crisis low of 6.8% in spring 2008. Unemployment in the Euro area needs still to come down a lot more to reach its pre-crisis level (8.5% in April 2018; 1.2 pp above rates ten years ago).


While there are improvements, unemployment rates still remain uneven across EU countries, with three member states still facing rates well above 10%.

 

Countries’ differences

While the recovery became more broad-based, important differences remain in countries’ growth prospects. There are with Malta, Ireland, Slovenia, Romania and Luxembourg five countries which are expected to grow at rates above 4%, while there are two countries (Italy and the UK), which are expected to see growth at rates of 1.5% or less.


In 2019, growth is expected to slow or stagnate at 2018 rates in all economies but Greece (+0.3 pp from 2018) and the Slovak Republic (+0.2). Similarly, when it comes to unemployment strong country differences remain. While in Greece, Spain and Italy unemployment rates are expected to remain above 10% at the end of the forecast horizon in 2019, rates are forecast to be below 4% in such states as Hungary, the Netherlands, Germany and the Czech Republic.


Finally, inflation is expected to exceed 2% in 12 EU countries in 2019, with the remaining 16 EU member states expected to see price increases in the range of 1.0% and 1.9%. 

 

All these predictions shall serve as a guiding signal in the member states political economy decision-making.





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