Analytics, Economics, EU – Baltic States, Modern EU

International Internet Magazine. Baltic States news & analytics Tuesday, 21.11.2017, 13:53

EU's economic forecast in Autumn 2017: growth in changing policy context

Eugene Eteris, European Studies Faculty, RSU, BC International Editor, Copenhagen, 13.11.2017.Print version
According to Autumn forecast, the European economy will continue to grow in both the euro area and in the EU as a whole at 2.1% in 2018 and at 1.9% in 2019; previous Spring forecast showed growth in 2018 at 1.8% in the euro area and 1.9% for the EU. Over the next two years, unemployment is set to decrease further to 8.5% in 2018 and 7.9% in 2019.

Each year since 2012, the Commission published three comprehensive forecasts: in winter, spring and autumn. From 2018, the European Commission will make four "economic reviews" each year: two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer). 

 

The interim forecasts will cover annual and quarterly GDP and inflation for the current and following years for all EU states and the euro-zone countries, as well as the EU's aggregates.

Thus, Commission's forecast will be in line with those of other economic institutions, e.g. the European Central Bank, International Monetary Fund and Organisation for Economic Co-operation and Development.

 

The present Autumn forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a final date of 23 October 2017. All other incoming data, including assumptions about government policies, are dated by the October 2017 too.

 


Acomplishments: Commission's opinion

The Commission's forecast shows that euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth at 2.2%. This is substantially higher than was expected in spring (1.7%). The EU economy as a whole is also set to beat expectations with robust growth of 2.3% this year (up from 1.9% in spring).

 

According to Autumn forecast, the European Commission expects growth to continue in both the euro area and in the EU at 2.1% in 2018 and at 1.9% in 2019 (Spring Forecast: 2018: 1.8% in the euro area, 1.9% in the EU).

 

Commission Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, Valdis Dombrovskis underlined that "economic growth and job creation were robust, investment was picking up and government deficit and debt were gradually decreasing".

 

There are however, he stresssed, some significant differences among EU states, with some of them still experiencing significant deficiences in the labour market.

 

The EU economic policies, he argued, would remain focused on making growth sustainable and inclusive. EU's economic guideline is towards "stability-oriented macroeconomic policies and reforms to boost productivity, adaptability to change and to ensure that the benefits of growth are spread widely across the states".

 

Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici said that after five years of moderate recovery, European growth has now accelerated, more jobs being created, with rising investment and strengthening public finances.

 

However, he added, "challenges remain in the form of high debt levels and subdued wage increases". Hence, determined efforts are needed by the EU states to ensure that growth will last and that structural convergence and the strengthening of the euro area are necessary factors in being resilient to future shocks and making it "a true motor of shared prosperity".


Growth surpassed expectations

The European economy has performed significantly better than expected in 2017, propelled by resilient private consumption, stronger growth around the world, and falling unemployment. Investment is also picking up amid favourable financing conditions and considerably brightened economic sentiment as uncertainty has faded. The economies of all EU states are expanding and their labour markets improving, but wages are rising only slowly.

 

The Autumn forecast has noted "changing policy context"; although cyclical recovery has now been underway for 18 uninterrupted quarters, it remains incomplete, with e.g. still significant slack in the labour market and untypically low wage growth. Therefore, GDP growth and inflation is still dependent on policy support. The European Central Bank has kept its monetary policy very accommodative while some other central banks around the world have started raising interest rates. A number of euro area states are expected to adopt expansionary fiscal policies in 2018 but the overall fiscal stance of the euro area is expected to stay broadly neutral.

 

Below are some extracts from the forecast according to economic policies:

- Unemployment continues to fall, acknowledged the Commission's forecast: job creation has been sustained and labour market conditions are set to benefit from the domestic-demand driven expansion, moderate wage growth, and structural reforms implemented in some EU states. Unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, as the total number of people employed climbs to a record high. Over the next two years, unemployment is set to decrease further to 8.5% in 2018 and 7.9% in 2019. In the EU, the unemployment rate is projected at 7.8% this year, 7.3% in 2018 and 7.0% in 2019. Job creation is expected to moderate, as temporary fiscal incentives fade in some countries and skill shortages emerge in others.

 

- In the inflation outlook, the headline consumer price inflation rate has fluctuated over the first nine months in 2017 under the influence of energy base effects. Core inflation, which excludes energy and unprocessed food prices, by contrast, has been rising but remains subdued, reflecting the impact of a prolonged period of low inflation, weak wage growth as well as remaining labour market showed quite moderate situation. Overall, inflation is expected to average 1.5% in the euro area in 2017 and is expected to dip to 1.4% in 2018 before climbing up to 1.6% in 2019.

 

- Public finances in the euro area are forecast to improve more than was expected in the spring, mostly thanks to the pick-up in growth. The headline government balance is expected to improve in almost all EU states. Under a no-policy-change assumption, the euro area general government deficit-to-GDP ratio is expected to fall to 0.8% in 2019 (1.1% in 2017 and 0.9% in 2018), while the debt-to-GDP ratio is forecast to decline to 85.2% (89.3% in 2017 and 87.2% in 2018).

 

- The risks that economic developments turning better or worse than previously forecasted are broadly balanced. The main downside risks are external, relating to elevated global geopolitical tensions, possibly tighter global financial conditions, economic adjustments in China or the extension of protectionist policies. In the EU states, downside risks relate to the outcome of the Brexit negotiations, a stronger appreciation of the euro, and higher long-term interest rates. By contrast, diminishing uncertainty and improving sentiment in the EU could lead to stronger-than-forecast growth, as could stronger growth in the rest of the world.

 

Ongoing negotiation on the UK's withdrawal from EU, the Commission's projections for 2019 are based on a purely technical assumption of status quo in terms of trading relations between the EU-27 and the UK.

 

More information:

Full document: Autumn 2017 Economic Forecast;

Press release: Spring 2017 Economic Forecast: steady growth ahead;

Full document: Spring 2017 Economic

Forecast.

Reference:

http://europa.eu/rapid/press-release_IP-17-4362_en.htm;

Latvian version: http://europa.eu/rapid/press-release_IP-17-4362_lv.htm






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