The euro-area economy will grow at the fastest pace in a decade this year, while the UK heads into an extended slowdown, the European Commission said, highlighting the increasing divergence between the continent and the British economy.
Raising its 2017 forecast for the 19-country bloc to 2.2% from 1.7% in May, the EU’s executive arm cited “resilient private consumption,” and it predicted a 2.1% expansion in 2018. It cut its 2017 prediction for the UK and sees growth cooling to just 1.1% in 2019, which would be the worst performance since the recession of 2009.
European Central Bank officials share the positive view of the economy, though they are wary of paring back their stimulus program too fast without more confidence in the inflation outlook. Executive Board member Benoit Coeure said yesterday the recovery is the strongest in almost two decades in terms of “robustness and balance.”
On euro-area consumer-price growth, the ECB’s own projections don’t foresee inflation returning to the goal of just under 2% until at least late 2019, a projection echoed by the commission yesterday.
After years tackling the financial crisis, the euro-area economy has racked up 18 straight quarters of growth and survey evidence points to continued solid expansion. The momentum provides a further support for the currency union after a critical electoral year that saw anti-EU populists defeated in a series of key votes.
“Economic growth and job creation are robust, investment is picking up and government deficit and debt are gradually decreasing,” European Commission vice-president Valdis Dombrovskis said. Job creation is projected to accelerate, bringing unemployment to 7.9% in 2019 from 10% at the end of last year.
Even with political risks subsiding, the EU is still trying to deal with President Donald Trump’s more-protectionist trade stance in the US, while negotiations over Britain’s withdrawal from the bloc have failed to make the desired headway.
“In the European Union, downside risks relate to the outcome of the Brexit negotiations, a stronger appreciation of the euro, and higher long-term interest rates,” the commission said. It also sees risks from “elevated geopolitical tensions” — citing North Korea — and economic adjustment in China or an extension of protectionist policies.
The forecast comes two weeks after the ECB announced plans to slow the pace of bond-buying in 2018, taking a step toward ending a stimulus program that has spent more than €2tn ($2.3tn) trying to revive inflation.
The EU’s executive body also highlighted the euro’s strength as a risk. It’s gained 10% against the dollar this year, partly on the ECB’s policy shift. “A stronger-than-assumed appreciation of the euro, especially if not driven by improved economic fundamentals, and a faster-than-assumed steepening of the yield curve would also constitute downside risks,” it said.
“Risks to growth and inflation projections are broadly balanced,” the commission said. “Remaining slack in the labour market and slow productivity growth are among the factors that continue to constrain wage dynamics and dampen inflation.”
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