Analytics, Economics, EU – Baltic States, Modern EU

Spring-2017 forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices (up to a cut-off date -25.04. 2017). Interest rate and commodity price assumptions reflect market expectations derived from derivatives markets at the time of the forecast. All other incoming data, including assumptions about government policies, the spring forecast takes into consideration information are also up to the end of April. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.

The European Commission expects euro area GDP growth of 1.7% in 2017 and 1.8% in 2018 (1.6% and 1.8% in the winter forecast), and GDP for the whole EO-28 at 1,9% during these two years (1.8% in both years in the winter forecast). 

Commission’s opinion

Vice-President for the Euro and Social Dialogue, Valdis Dombrovskis (also in charge of Financial Stability, Financial Services and Capital Markets Union), said that the spring 2017 economic forecast showed that growth in the EU was “gaining strength and unemployment continued to decline”.

However, he added. The situation was different from among EU member states with better performance recorded in the economies that have implemented more ambitious structural reforms. Therefore, he argued, that “to redress the balance, decisive reforms across Europe were needed: from opening up products and services markets to modernising labour market and welfare systems”. Hence, the EU member states’ economies have to evolve, offering more opportunities and a better standard of living.

Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici, said that the EU was entering its fifth consecutive year of growth “supported by accommodative monetary policies, robust business and consumer confidence and improving world trade”.

He added that there were good signs for “easing high uncertainty” in the growth rates during 2016; however, the euro area recovery in jobs and investment remains uneven.

Therefore, he concluded, “tackling the causes of the divergences was the key challenge to be addressed in 2017-18”. 

Main spring-17 forecast features

- Increased global growth. The spring-17 forecast has shown that global economy gathered momentum during 2016 and in early 2017 as growth in many advanced and emerging economies picked up simultaneously. Global growth (excluding the EU) is expected to strengthen to 3.7% during 2017 and to 3.9% in 2018 from 3.2% in 2016 (unchanged from the winter forecast) as the Chinese economy remains resilient in the near term and as recovering commodity prices help other emerging economies. The outlook for the US economy is largely unchanged compared to the winter. Overall, net exports are expected to be neutral for the euro area's GDP growth in 2017 and 2018.

- Temporary rise in headline inflation. Inflation has risen significantly in recent months, mainly due to oil price increases. However, core inflation, which excludes volatile energy and unprocessed food prices, has remained relatively stable and substantially below its long-term average. Inflation in the euro area is forecast to rise from 0.2% in 2016 to 1.6% in 2017 before returning to 1.3% in 2018 as the effect of rising oil prices fades away.

- Private consumption to slow with inflation, investment remaining steady. Private consumption, the main growth driver in recent years, expanded at its fastest pace in 10 years in 2016 but is set to moderate this year as inflation partly erodes gains in the purchasing power of households. As inflation is expected to ease next year, private consumption should pick up again slightly. Investment is expected to expand fairly steadily but remains hampered by the modest growth outlook and the need to continue deleveraging in some sectors. A number of factors support a gradual pick-up, such as rising capacity utilisation rates, corporate profitability and attractive financing conditions, also through the Investment Plan for Europe.

- Falling unemployment. Unemployment continues its downward trend, but it remains high in many countries. In the euro area, it is expected to fall to 9.4% in 2017 and 8.9% in 2018, its lowest level since the start of 2009. This is thanks to rising domestic demand, structural reforms and other government policies in certain countries which encourage robust job creation. The trend in the EU as a whole is expected to be similar, with unemployment forecast to fall to 8.0% in 2017 and 7.7% in 2018, the lowest since late 2008. For example, in Latvia unemployment rate dropped in May 2017 to about 8%.

- The state of public finances is improving. Both the general government deficit-to-GDP ratio and the gross debt-to-GDP ratio are expected to fall during 2017-18, in both the euro area and the EU-28. Lower interest payments and public sector wage moderation should ensure that deficits continue to decline, albeit at a slower pace than in recent years. In the euro area, the government deficit to-GDP ratio is forecast to decline from 1.5% of GDP in 2016 to 1.4% in 2017 and 1.3% in 2018, while in the EU the ratio is expected to fall from 1.7% in 2016 to 1.6% in 2017 and 1.5% in 2018. The debt-to-GDP ratio of the euro area is forecast to fall from 91.3% in 2016 to 90.3% in 2017 and 89.0% in 2018, while the ratio in the EU as a whole is forecast to fall from 85.1% in 2016 to 84.8% in 2017 and 83.6% in 2018.

- Risks are more balanced but still evident. The uncertainty surrounding the economic outlook remains elevated. Overall, risks have become more balanced than in the winter but they remain tilted to the downside. External risks are linked, for instance, to future US economic and trade policy and broader geopolitical tensions. China’s economic adjustment, the health of the banking sector in Europe and the upcoming negotiations with the UK on the country's exit from the EU are also considered as possible downside risks in the forecast.

Further information about the forecast: 

- Spring 2017 Economic Forecast;

- European Economic Forecast- explanatory website; 

Press release

- Winter 2017 Economic Forecast: Navigating through choppy waters; 

- Winter 2017 Economic Forecast.  

Main reference: European Commission, Press release IP-17-1237 “Spring 2017 economic forecast: steady growth ahead”, Brussels 11.05.2017.

In http://europa.eu/rapid/press-release_IP-17-1237_en.htm;

Latvian version at: http://europa.eu/rapid/press-release_IP-17-1237_lv.htm.