Editor's note

International Internet Magazine. Baltic States news & analytics Sunday, 24.03.2019, 03:14

EU economy’s future: slow but positive growth

Eugene Eteris, European Studies Faculty, RSU, BC International Editor, Copenhagen, 14.02.2019.Print version

Growth in all EU states will continue in 2019-20, though at a slower pace than before. The largest EU’s economies will grow at around 1,5-1,7%, mostly in Poland, Spain and Holland. The Baltic States’ growth will continue to be on the positive trend.

This February, Commissioner P. Moscovici presented a winter economic forecast for the next two years. Several modern development features, e.g. downward in oil prices and in inflation, with favorable labour market developments have shown that the European growth is on a positive line

Energy and resources’ aspects

Download changes in global oil demand coincided with the global economy’s gradual shifts to lower gear. There are little chances for oil prices to rise, also due to higher oil supply projections on the global markets: average oil price is assumed to be about 14 % lower in 2019 compared to the last year. For the EU’s economy, the expected decline in oil prices could do more good, as oil prices are going to be about 20% lower in both 2019 and 2020.  

 

The decrease in oil prices will partially support economic activity, mainly through its impact on households' purchasing power and corporate costs.

 

Due to the significant downward revision in oil price assumptions, the EU’s inflation in the euro area in 2019 is going to slow down markedly from 1.8% in the autumn to 1,4% presently; in 2020, the expectations in inflation would be around 1.5-1.6%. Favourable labour market developments should remain to support solid wage growth.  

 

In the beginning of 2019, the global financial market prices have shown high volatility: investors were moving from riskier assets to safer ones before regaining some “risk appetite” recently. This investors’ move was motivated by investors' re-assessment of the underlying global economic outlook and more dovish messages from key central banks and easing fears of a faster-than-expected monetary policy normalisation. In Europe, sovereign bond spreads have narrowed reflecting lower risk perception. Country specific factors played major role, especially on the Italian debt market as Italian spreads narrowed significantly, after the government put forward amendments to its draft budget in December 2018.

Continued growth

Progress in all EU states will continue in 2019, though mostly a slower pace than before: the GDP growth in 2019-20 is expected above the EU average of 1.5% and 1.7% respectively in Poland, Spain and in Netherlands.

 

Growth in Germany is expected to slow markedly being adjusted by the German authorities from 1.5% last year to 1.1% this year, as a result of weakening export growth and disappointing private consumption growth, despite the buoyant employment situation. A factor in the slowdown in the second half of 2018 were obviously bottlenecks in environmental certification in the automotive sector, which led to a pronounced decline in car purchases. Looking forward, domestic demand should be supported by a strong labour market and some fiscal loosening. A higher number of working days is also set to help pushing growth to 1.7% in 2020, the same rate as the EU’s average.

 

In France the growth is at the level of 1,3% of GDP this year up to 1,5% en 2020. Italy has fallen into technical recession in the second half of last year, as the impact of less dynamic world trade was compounded by sluggish domestic demand, particularly investment. Uncertainty and rising financing costs also took their toll: hence, growth is now forecast to be at 0.2% in 2019 and 0.8% in 2020, reflecting a slight pick-up in the second half this year with more working days in 2020. In Spain, GDP growth is expected to remain above the EU average though less markedly than in the preceding years. At 2.1% in 2019 and 1.9% in 2020, the economic expansion would also moderate compared to last year at 2.5%. This moderation is expected to be driven by a slowdown in private consumption with a view to increase the record low households' savings rate; but still the performance of Spain is above the EU average.

 

In the UK, economic activity is expected to have decelerated at the end of last year due to heightened uncertainty over the UK's future trading relationship with the EU. GDP growth is expected to remain subdued this year and next at 1.3%, slightly higher than projected in the Semester’s autumn forecast, which was based on the purely technical assumption of status quo in terms of trading relations between the EU and the UK.

 

In Greece, growth is forecast to reach 2.2% in 2019 and 2.3 in 2020, so this could be well above the euro area average. Consumer confidence had almost returned to pre-crisis heights by the end of 2018, and private consumption is likely to remain a major supporter of growth in 2019. The recovery remains heavily contingent on the continuing implementation of reforms.

Finally, growth in some smaller central and eastern European economies is set to remain particularly strong, as they benefit from robust domestic demand fuelled by dynamic wage growth and the impact of the EU funds.   

Uncertainties, risks and positive aspects in growth

However, the EU economy in general is facing an exceptional amount of uncertainty, which could weigh as well on investment and consumption more severely than currently expected. The Commission strives for a “balance of risk”; though presently the balance moved to the downside, according to the EU’s forecast. The downside risks include the following factors:

= trade tensions between the US and China have seen considerable uncertainty;

= investors' perceptions on the global growth could turn more pessimistic, which in turn could affect the real economy; many emerging market economies remain vulnerable to changes in global risk sentiment;

= within the euro area, the risk of sovereign-bank loops persists, even if they seem currently less pronounced in the context of generally low sovereign yields;

= Commission sees a status quo in trade relations with the UK: failure to secure a “smooth Brexit” would impact growth in the UK more than in the EU states.

 

Positive aspects in the EU include still favourable labour market conditions, supply constraints in some states and the extended use of the EU budget in recipient countries; these factors could trigger some additional domestic demand, though the balance is on the downside slope, conclude the Commission. It added that after the very strong growth in 2017, the EU’s economy was decelerating: the trend would continue in 2019, with growth reaching 1,5%. The slowdown is to be more pronounced, especially in the euro area, due to global trade uncertainties and domestic factors in the EU’s largest economies.


Nonetheless, Europe's economic fundamentals remain solid with positive labour market situation and expectations for growth to rebound gradually in the second half of this year and in 2020.


Reference: Commission press release: Winter 2019 Economic Forecast, in:

http://europa.eu/rapid/press-release_SPEECH-19-905_en.htm?locale=en/12.02.2019





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