The European Commission cut expected EU growth for this year by 0.2% compared to its forecast less than three months ago, as output was weaker than expected during the first semester and external risks, especially the trade war, are on the rise.
According to the latest forecast published on Thursday (12 July), the Commission expects the EU and euro area economies to grow by 2.1% this year (2.3% in May).
The outlook remains unchanged for 2019, when the bloc’s economy, including the United Kingdom, is expected to grow by 2%, the same figure as the eurozone.
Despite claiming that European economies are “strong”, EU economic affairs Commissioner Pierre Moscovici warned that “risks are many on the external side”, during the presentation of the summer’s interim forecast.
The forecast included updated numbers for growth and inflation but did not revise the fiscal situation of national economies.
The Commissioner was worried about a further escalation in the trade war, triggered by US President Donald Trump against his major trading partners including the EU and China.
“Protectionism is good for no one,” Moscovici told reporters. It brings “only casualties and losses”.
Besides external risks, there are also internal challenges such as “policy uncertainty in some member states”, Moscovici said, including the Brexit negotiations.
“The uncertainty surrounding the outcome of the Brexit transition agreement weighs on confidence,” the forecast warned, and is one of the reasons for lower growth next year.
Further tensions are also expected with Italy later in autumn, when the populist government is set to submit its draft budgetary plan for next year, with public spending increasing against the EU’s recommendations.
Higher oil prices are also weighing on the demand of major economies, including Spain.
The Commission also noted that the parallel growth of larger economies, which helped to fuel the expansion, is becoming more differentiated.
End of the cycle?
Last May, the Commission’s director general for Economic and Financial Affairs, Marco Buti, said that an escalation in the trade war could disrupt the global value chain and European expansion could be thrown “off track”.
Moscovici said that, until now, protectionist measures “have not damaged the strength of our economy” and the conditions for the continuation of the expansion “are still met”.
Among them, the EU executive named supportive monetary policy, improving labour market conditions and robust private demand thanks to the better economic situation of companies and households.
“I don’t want to underestimate downside risks, they undoubtedly exist” especially the trade disputes but “we are still on this cycle of expansion so we are not expecting any kind of catastrophe”, Moscovici commented.
According to Eurostat, exports outside the EU fell by 0.3% in the first quarter, compared with the same period of last year. Intra-EU exports fell by 0.6%.
The EU executive warned that further escalating the trade conflicts would affect “welfare” in the nations involved. Their negative effects could be amplified by financial markets instability triggered by divergent strategies among central banks to withdraw the monetary support.
Turbulence also hit the European markets. The depreciation of the euro versus dollar helped exporters and eurozone markets, but the trade tensions and the higher oil prices weighed on the EU stocks.
The political instability in member states including Italy also had a negative impact on investor sentiment, the Commission noted.
The growth momentum seen in 2017 started to fade away during the first half of the year, and the slowdown was worse than expected, officials said.
The Commission suggested that European growth has been running above its long-run rate for some time. Temporary factors could also affect the output, including weather conditions, the timing of Easter and influenza-related sick leave.