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06/12/2016

Commission cuts growth forecast for both EU and eurozone in 2017

Euro & Finance

Commission cuts growth forecast for both EU and eurozone in 2017

Commissioner for Economic Affairs, Pierre Moscovici, during the presentation of the economic forecast on 9 November.

[European Commission]

Europe’s economy will grow less than initially expected as domestic and global risks have intensified – mainly in the wake of the UK referendum and the increased opposition to globalisation.

The European Commission presented on Wednesday (9 November) a rather bleak economic forecast for the next three years.

A few hours after Republican candidate Donald Trump won the US elections, the document warned that “uncertainty and vulnerabilities are large and widespread”.

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Economic Affairs commissioner, Pierre Moscovici, told reporters that “many citizens feel excluded” from the economic recovery. That is why narrowing the gap between the winners and losers of globalisation should be a priority.

Moscovici attacked Trump’s rhetoric over the past months. But he explained that his criticism was against the candidate.

“I think and I hope things will be different [now that he is president], that is often the way things turn out to be”, he added.

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He recalled that “there are of course expectations on this side of the Atlantic” when it comes to the global challenges the EU and the US need to address together, such as economy, trade, security or climate change.

“I would imagine that the US remains a strong and trusted partner of the EU”, he added.

Against globalisation

At a global scale, geopolitical uncertainties are pervasive, and “the ‘new backlash against globalisation’ has given rise to protectionist tendencies and political uncertainties with economic risks in their trail,” wrote in the economic forecast Commission’s Director-General for Economic and Financial Affairs, Mario Buti.

He indicated that the expected GDP growth “may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent”.

The Commission cut its growth forecast by 0.3% for next year for the eurozone and the EU as a whole.

The executive expects GDP growth in the eurozone at 1.7% in 2016, 1.5% in 2017 and 1.7% in 2018. The spring forecast predicted 1.6% in 2016, 1.8% in 2017.

GDP growth in the EU will be 1.8% this year, 1.6% in 2017 and 1.8% in 2018. Last spring, the Commission expected 1.8% in 2016 and 1.9% in 2017.

Brexit’s damage

Looking at the sources of instability and challenges, the document highlighted the uncertainty emerging from the Brexit referendum.

“An extended period of uncertainty could also magnify its negative impact,” the forecast warned.

The immediate negative effects of the brexit referendum were less intense than expected in Britain. The Commission revised upwards its growth forecast to 1.9% for this year.

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However, the Commission cut almost by half the figure for next year and expects Britain to grow only 1%.

“This reflects what could be the impact of Brexit as businesses react to current uncertainty cancelling investment”, Moscovici said.

For the Commission experts, the outcome of the referendum could be seen as “an indicator of the increased political risks deriving from opposition to globalisation and free trade arrangements and thereby to the outlook for global trade.”

But the executive also remains concerned about the situation of the European banks given the low profitability.

Looking abroad, risks have also increased, in particular due to the “disorderly” adjustment of the Chinese economy and “aggravating geopolitical conflicts”.

Lower growth

This gloomy forecast weighted on the output projected for the European economies.
Poland (3.4%) and Spain (2.3%) will be the fastest growing economies next year among the biggest countries.

However, Spain will be the only eurozone member with its deficit above the mandatory 3% of GDP in 2017.

Germany, the EU’s economic powerhouse, is expected to underperform compared to its neighbours as it will grow only 1.5% in 2017.

The recovery in France will continue at a moderate pace. Its deficit is expected to fall from 3.3% of GDP in 2016 to 2.9% in 2017.

Italy is expected to register an economic growth below 1% till 2018. The additional spending to deal with the migrant crisis and the earthquakes will contribute to “a marked worsening of the structural balance in 2016 and 2017”, the Commission warned.

Moscovici said that the institution understands the “economic and social difficulties” the country faces and will take these circumstances into account “in a fair manner”.

Italy and Spain: A tale of two deficits

While Italy has opted for a confrontational approach to clinch budget spending leeway from the European Commission, Spain is hoping that better-than-expected growth will placate EU demands.

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Timeline

  • 16 November: European Commission's opinion on draft budgetary plans for 2017.

Further Reading