The European Commission kept its growth forecast unchanged at 1.2% on Wednesday (10 July) but revised downwards inflation to 1.3% for this year and the next, strengthening the case for further monetary stimulus as global economic risks worsen.
“Given the numerous risks to the outlook, we must intensify efforts to further strengthen the resilience of our economies and of the euro area as a whole,” said Economic Affairs commissioner, Pierre Moscovici.
The Commission’s summer forecast only updates the GDP and inflation figures for the EU member states and the bloc as a whole.
All member states are expected to grow over the next two years.
As predicted last May, eurozone growth is expected to grow by 1.2% this year, while it will improve by 1.4% next year, slightly less than predicted in spring.
The GDP forecast for the EU remains unchanged at 1.4% in 2019 and 1.6% in 2020.
The worrying signals continue to come from the inflation forecasts, especially as Europe is at risk of sliding into a Japanese scenario of low inflation and low growth.
Despite the low level of interest rates, that the European Central Bank has pledged to maintain at least until the middle of 2020, the Commission cut its inflation forecast to 1.3% both for 2019 and 2020 (compared with 1.4% for both years predicted in May).
Prices were pushed down primarily by the fall of oil prices, amid the growing uncertainties related to global growth and the worsening of the US-China trade dispute. The recent tensions in the Middle East, in particular in the Strait of Hormuz, have slightly increased prices above $65 per barrel.
In addition, the wage growth seen in various member states is not having any impact so far, as companies are reluctant to increase prices given the high uncertainty.
The weak inflation foreseen for the next two years, together with the worsening of the trade war and the possibility of a disorderly Brexit, could bring a fresh monetary stimulus closer, as ECB president Mario Draghi hinted in early June.
Draghi told reporters that the ECB governing council had discussed the possibility of restarting the assets purchasing programme.
The Commission’s forecast said that the evolution of the eurozone economy will depend on “the resilience of the services sector and the labour market in the face of manufacturing weakness; the robust growth in Central and Eastern Europe, which contrasts with the slowdown in Germany and Italy; and the missing pass-through from higher wages to core inflation.”
Moscovici noted that the growth seen during the first quarter of this year was “vigorous”, but was based on temporary factors, including the good sales of new vehicles, stockpiling in the UK ahead of the original Brexit date (29 March), and the mild winter that was favourable for the construction sector.
But the horizon looks gloomier for the months ahead, as the slowdown of the manufacturing sector has not hit the bottom yet, and the trade tensions could worsen, also between the EU and US.
“The growth prospects outside the EU are weak,” Moscovici said.
Core vs periphery
Within the EU, central and eastern economies are expected to grow faster than the core member states, partly thanks to the cushion provided by EU funds to cope with global turbulence.
Spain continues to be the best-performing economy among the largest ones. Its growth forecast was improved to 2.3% for this year, in spite of prime minister Pedro Sánchez’s difficulties to secure a majority after the inconclusive elections held in April.
“The Spanish economy is really doing better, and I am pleased about that,” Moscovici said.
By contrast, investors expected that it would be hard for Germany and Italy to avoid a recession this year.
The Commission, however, predicted that German output will remain positive this year, at 0.5%, thanks to “resilient” domestic demand, and will improve by 1.4% next year.
The Italian GDP will be stagnant this year, at 0.1%, before slowly picking up in 2020 to reach 0.7%.