Brussels, 04/02/2016 (Agence Europe) - Compared to November 2015, the European Commission tweaked its growth forecasts for 2016 very slightly downwards on Thursday 4 February, stressing the downward risks from such things as the slow-down of the emerging economies.
“Recovery has firmly taken root”, as the European economy continues to benefit from “headwinds which are likely to grow stronger and last longer”, such as low oil prices, a lower exchange rate and the accommodative policy of the ECB - but “tailwinds” are also growing stronger, particularly due to the downturn in the emerging economies such as China, says the European Commissioner for Economic and Financial Affairs, Pierre Moscovici.
In its winter economic forecasts, the Commission anticipates GDP growth in the eurozone of 1.6% in 2015, 1.7% in 2016 and 1.9% in 2017 (1.9% in 2016 and 2.0% in 2017 in the EU), whereas in November of last year, it was predicting growth of 1.6% in 2015 and 1.8% in 2016 (see EUROPE 11425).
The main driver of growth will be the increase in private consumption, driven mainly by the drop in unemployment. Moscovici nonetheless observed that “investment (was struggling) to stimulate economic growth”, even though it is set to increase in 2016 and 2017. The Commission also takes the view that public expenditure related to the integration of refugees will support growth in the host countries. It does not refer to the hypothesis of the United Kingdom leaving the European Union as a downwards risk given that, due to the “useful progress” made in the negotiations with London (see EUROPE 11481), everything is in place to keep London in the EU.
The national disparities remain high. In 2016, growth is expected to be highest in Ireland (+4.5% of GDP), Romania (+4.2%), Malta (+3.9%), Luxembourg (+3.8%) and Poland (+3.5%). It will be considerable in Spain (+2.8%), solid in Germany (+1.8%) and modest in Italy (+1.4%) and France (+1.3%). Only the Greek economy will be in recession in 2016 (-0.7%), but will bounce back in 2017 (+2.7%).
In 2016, the cumulative public deficit will continue to fall, to stand at 1.9% of GDP in the Eurozone and at 2.2% in the EU as a whole in 2016 (respectively 1.6% and 1.8% in 2017, assuming the trajectory continues as it is). Here again, the national disparities are considerable. Seven countries are expected to record a deficit greater than or equal to the threshold of 3% of GDP: Croatia (-3.9%), Spain (-3.6%) - the country is expected to adopt new measures once a government is in place, Moscovici pointed out (see EUROPE 11408) - Greece, France and Portugal (-3.4% each), the United Kingdom (-3.1%) and Romania (-3.0%). Four countries of the Eurozone are expected to end up in a budgetary surplus situation: Luxembourg (+0.5%): Estonia (+0.2%) and Germany and Cyprus (+0.1%).
The ratio of public debt to GDP is expected to continue to fall, standing at 92.7% in 2016 (91.3% in 2017) in the eurozone and 86.9% in the EU (85.7% in 2017). In proportion to national wealth, debt in 2016 will be highest in Greece (+185.0%), Italy (+132.4%), Portugal (+128.5%), Belgium (+106.6%) and Spain (+101.2%). It will rise in France (+96.2% in 2015, +96.8% in 2016, +97.1% in 2017) and will drop sharply in Spain (+71.6% in 2015, +69.2% in 2016, +66.8% in 2017). Debt will be lowest in Estonia (+9.6%), Luxembourg (+22.0%) and Bulgaria (+30.7%).
Again with sizeable disparities, the unemployment rate will continue its downward trend in 2016, at 10.5% in the eurozone and 9.0% in the EU. Although down, it will remain high in Greece (24.0%) and Spain (20.4%), and will remain stable in France (10.5%). The drops observed in Spain, Portugal, Cyprus and Ireland, countries in which employment market reforms have been undertaken, are “examples to be followed” by the countries which have not set similar reforms in place, Moscovici commented.
Portugal. With the European Commission to publish its opinion on the draft Portuguese budget for 2016 on Friday, the forecasts for Portugal (growth of 1.6% of GDP, nominal deficit of 3.4%) do not reflect the substance of the negotiations underway, Moscovici said. He added that the latest Portuguese proposals were a step in the right direction. The Commission is calling for a structural budgetary effort (+0.6%) which is greater than the one stated in the draft Portuguese budget (+0.2%) (see EUROPE 11481).
Italy. With the press fanning the flames, a debate is raging in Italy between the Italian government and the European institutions on the scope of the budgetary flexibilities with regard to the Stability and Growth Pact to be granted to the country. The Commissioner, who hopes to calm things down with “the eurozone country which stands to benefit the most from the flexibilities”, the Commissioner listed the additional leeway requested by Rome and currently being examined by the Commission, with the answer expected in “May”: - flexibility to carry out further structural reforms on top of the flexibility granted in 2015 (deviation of 0.4% of GDP); - other leeway related to public expenditure earmarked to host refugees and fight terrorism.
France. As for the country he knows the best, the former French finance minister said that as things stand at the moment, the target to bring the French deficit below the threshold of 3% in 2017 will “not be met” and the deficit will remain in the region of -3.2% of GDP. Without additional structural efforts, it will be difficult, but with appropriate measures, it is doable, he observed.
Non-eurozone countries. Growth in the United Kingdom (2.3% of GDP) in 2015 was driven by “healthy” private consumption and investment. It is expected to stand at 2.1% in 2016 and in 2017. Deficit prospects remain largely unchanged, although in November, the government reduced the scale of its budgetary cuts. This stability can be explained by higher tax revenue than forecast and less interest on the debt. The deficit is expected to stand at 4.1% of GDP in 2015-2016 and 2.6% in 2016-2017, with the debt/GDP ratio climbing to 87.6% of GDP in 2015-2060 (86.1% in 2017-2018).
In Poland, growth is expected to remain healthy (3.5% of GDP in 2015, 2016 and 2017). However, the Commission predicts that the deficit could be 3.4% of GDP in 2017 unless additional measures are taken. Prospects for 2016 will depend on the final outcome of recent proposals of the government, particularly lowering the retirement age. Debt is expected to be in the neighbourhood of 54% of GDP in 2017.
Greece. Greek growth is expected to be “negative for the whole of 2016, but considerably less so than we anticipated” in the autumn, Moscovici said. Activity is expected to shrink (-0.7%) this year, rather than growing by more than 1.0% as initially anticipated, before bouncing back (+2.7%) in 2017. “Reforms and confidence are the key to recovery for the Greek economy”, the Commission explained. The Greek economy rode out the storm in 2015, even though it experienced bank closures, the introduction of controls on the movement of capital and uncertainty related to negotiations on the third bailout plan. Private consumption was stronger than anticipated, with households choosing to use their savings in order to avoid being called upon for contributions in the bank recapitalisation process. According to the Commission, the Greek budget for 2016 is planning additional savings of 1.1% of GDP thanks to pensions reform, income tax and a renationalisation of expenditure. However, “other measures will be needed in 2016 and 2017 to reach the target of the programme in terms of primary budgetary surpluses of 0.5% of GDP in 2016 and 1.75% in 2017”, the European institution warns. Lastly, debt projections have been revised downwards due to the lower than anticipated costs of bank recapitalisation (185% of GDP in 2016 and 181.8% in 2017).
Cyprus. The island, which is getting ready to exit its bailout plan, returned to growth in 2015 (1.4% of GDP). This growth, which was driven mainly by internal and external demand, is expected to consolidate in 2016 (1.5%) and 2017 (2%). Cyprus will not need all of the envelope earmarked in its bailout plan, but at this stage, the Commission has not made any reference to a positive impact on the debt. This year, this debt is expected to fall back below the 100% of GDP mark, having stood at 108.4% of GDP in 2015. (Original version in French by Mathieu Bion and Elodie Lamer)