European economy beats expectations as risks decline

Commissioner for Economic Affairs, Pierre Moscovici, highlighted that the eurozone's economic activity accelerated during the first semester. [European Commission]

The European economy is enjoying a period of positive momentum as growth spreads across all member states, public accounts are expected to look healthier and risks are balanced for the first time in a long while, the European Commission concluded on Thursday (9 November).

“These are the highest growth rates in ten years,” said an exultant Commissioner for Economic Affairs Pierre Moscovici during the presentation of the autumn economic forecast.

The EU executive significantly improved its growth estimate for this year for the eurozone to 2.2%, compared with 1.7% in spring. For the EU as a whole, the figure has also improved to 2.3% GDP growth, compared with 1.9% in the previous forecast.

For 2018, the economy will also beat expectations by growing 2.1% both in the euro area and the 28 member states, compared to 1.8% and 1.9% predicted in spring, respectively.

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The Commission noted that the positive news is partly due to the acceleration of  economic activity during the first half of this year.

Meanwhile, uncertainty decreased, as the intense electoral cycle was confined to the history books and as the impact of populist and anti-European parties was contained.

Still, Moscovici admitted that this recovery has been “more subdued” than in past recessions and he blamed the “sluggish” wage growth in the national economies.

No Catalan impact

The solid march of the economy across the bloc was visible in Moscovici’s analysis of member states, including those facing severe political turbulence, like Spain.

The Commission slightly improved its forecast for next year to 2.5% GDP growth, higher even that the figure released by the Spanish government (2.3%).

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Officials explained that they have not included the impact of the Catalan crisis in the central scenario. “The risk exists that future developments could have an impact on growth, the size of which cannot be anticipated at this stage,” the forecast document explained.

Moscovici even suggested that Spain, one of the very few countries still in an excessive deficit procedure, could exit the ‘red zone’ next year.

According to the forecast, the deficit will be 3.1% this year but “we are not excluding the fact that we may have a nice surprise”, he told reporters. Spain will meet the requirement to maintain the deficit well below the 3% threshold over the next two years.

“If the  situation improves in next weeks, the output  growth could be above 2.3%, because in absence of the Catalan issue, the Spanish economy’s growth  would have been very close to this year’s,” Spanish Economic Affairs Minister Luis de Guindos said. Spanish GDP is expected to increase by 3.1% in 2017.

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The upbeat tone was also noticeable when he referred to other economies struggling to balance their public accounts (France), to relaunch their growth (Italy) or to return to the markets (Greece).

In the case of France, Moscovici said that the risks are balanced. Therefore, if the French government continues with reform efforts, “I believe it will come out of the procedure in Spring 2018.”

The French deficit is expected to be 2.9% of GDP this year and the next, and will increase to 3% in 2019.

France’s finance ministry confirmed in a statement its “determination” to implement the measures to exit the excessive deficit procedure. It was the first time that its deficit remained below the 3% threshold within the three-year forecast horizon in a decade, the ministry noted.

On track

Italy’s growth figures are projected to be well below the eurozone average: 1.5% in 2017, 1.3% in 2018 and just 1% in 2019.

However, Moscovici opted for a positive reading of the country’s situation to point out that the recovery is “really going on”, and the economy remains “on the right track”.

The French Commissioner was also “rather optimistic” regarding the Greek programme. The international lenders and Athens are aiming at concluding the third review of the bailout scheme in December, in order to pave the way for a successful exit of the rescue programme next August.

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Recent developments, including the public notaries strike, could derail the efforts to improve the financial situation.

In addition, the executive cut the growth forecast for this year half point to 1.6%.

Still, Mosovici insisted that the Greek efforts are “on track” to cut ties with its aid scheme and return to the markets next year.

Despite the improved situation, important challenges remain, among them the still high level of public debt in Europe (almost 90% of GDP), the persistent high unemployment level in countries like Spain or Greece, and the low wage growth, which shows that the economic momentum is not felt by many Europeans.

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“Stronger wage growth would be an important signpost for the sustainability of the expansion, as it would underpin continued private consumption growth and contribute towards price stability”, wrote in the forecast paper Marco Buti, director general for Economic and Financial Affairs.

Public investment continues to be below pre-crisis level, the inflation remains subdued, and productivity needs to pick up.

The risks emerge chiefly from the geopolitical front, for example, a worsening scenario with North Korea.

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