EU forecasts stronger euro-area growth as Brexit risks remain

European Central Bank Executive Board Member Sabine Lautenschlager

The euro-area economy will expand faster than previously anticipated this year and next, the European Commission said, though it offered little comfort to the region’s central bank, saying inflation is expected to remain subdued. It sees expansion of 2.3 percent in 2018, up from 2.1 percent predicted last November and close to the decade-high rate reached in 2017. The 2019 forecast was upgraded to 2 percent—meaning the outlook is broadly in line with the most recent projections from the European Central Bank (ECB) and International Monetary Fund.

The rosier outlook reflects both stronger cyclical momentum in Europe, where labor markets continue to improve and economic sentiment is high, and a stronger-than-expected pickup in global trade, the commission said in the report published on Wednesday. The higher forecasts follow eurozone growth of 2.4 percent last year.

The commission also lifted its forecasts for the European Union excluding the United Kingdom, which is negotiating its exit from the bloc.

Growth is seen at 2.5 percent and 2.1 percent this year and next.

The UK will grow by 1.4 percent in 2018, slightly faster than previously projected, but still below the average for the region. After years tackling the financial crisis, the euro-area economy has racked up 19 straight quarters of growth and surveys point 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, and comes as the bloc seeks to strengthen itself in order to be better shielded from future turmoil.

“Europe’s economy has entered 2018 in robust health,” said Pierre Moscovici, the EU’s economic affairs commissioner. “Growth is also more balanced than it was a decade ago.”

In further good news for the region, German Chancellor Angela Merkel’s bloc concluded a coalition agreement with the Social Democratic Party on Wednesday, ending a four-month stalemate in Europe’s largest economy.

Even with political risks subsiding, the EU is still trying to deal with US President Donald J. Trump’s more-protectionist trade stance, while Brexit presents another source of uncertainty.

The forecasts also come after a global rout that rattled markets in recent days. Wednesday saw a small rebound in European stocks, but markets remain on edge, and a sustained slump could damage confidence and global growth.

The volatility comes at a particularly sensitive time for the ECB, as policy-makers try to judge whether they can end their bond-buying program.

While the euro area has just posted its strongest economic expansion in a decade, consumer-price growth remains muted. In its forecasts, the commission sees euro-area inflation at 1.5 percent this year, slightly faster than in earlier projections, but its 2019 figure is unchanged at 1.6 percent.

The ECB aims to get inflation to just below 2 percent over the medium term.

With the expansion looking stronger and unemployment falling, policy-makers are considering the smoothest way out of their asset-purchase program.

Speaking to European lawmakers earlier this week, ECB President Mario Draghi said the central bank still can’t claim success in its struggle to restore inflation, and defended its policies from complaints that they widen inequalities.

“While our confidence that inflation will converge toward our aim of below, but close to, 2 percent has strengthened, we cannot yet declare victory on this front,” he said. “Monetary policy will evolve in a fully data-dependent and time-consistent manner.”

 

 

Suntrust banner2
Turning Points 2018