The European Commission’s interim winter economic forecasts, which were published on Wednesday 7 February, confirmed a return to growth in all countries of the European Union in 2017, with a growth rate of 2.4% of GDP in both the Eurozone and the European Union, which is the highest recorded level in ten years.
These figures, then, have been re-evaluated upwards compared to the autumn economic forecasts, which were unveiled by the Commission on 9 November 2017 (see EUROPE 11901), when the institution predicted growth of 2.2% of GDP for the Eurozone and of 2.3% of GDP for the EU in 2017. Last year, all EU countries experienced economic growth, despite significant differences between member states (7.3% of GDP in Ireland down to 1.5% of GDP in Italy).
The economic forecasts for the years 2018 and 2019 have also been tweaked upwards. The Eurozone and the EU are expected to see growth rates of 2.3% of GDP in 2018 and 2.0% of GDP in 2019. However, the rates could slightly outperform expectations, particularly due to renewed confidence and good news on the job market. The Commission furthermore considers that uncertainty surrounding growth is now more balanced, but states that uncertainty related to the negotiations on the United Kingdom’s withdrawal from the EU is still apparent, even though the parties agreed on 8 December of last year to open the second phase of talks on the future relationship between the UK and the Twenty-Seven (see EUROPE 11922).
On the jobs front, the Commission notes an increase in employment of 1.6% in the Eurozone in 2017, reflected in a record number of people in work. At the same time, the unemployment rate in the Eurozone stood at 8.7% of the active population, which is the lowest rate since January 2009.
In 2017, inflation stood at 1.5% in the Eurozone and it is expected to remain stable in 2018 (1.5%) and 2019 (1.6%).
Addressing the press, the Commissioner for Economic and Financial Affairs, Pierre Moscovici, welcomed the current situation: “economic growth is now solid”. “It is also more balanced than it was a decade ago - and provided we pursue smart structural reforms and responsible fiscal policies - it can also be more durable”, he added.
This was echoed by Valdis Dombrovskis, the Vice-President of the European Commission with Responsibility for the euro and Social Dialogue, who said that “we should use this time to make our economies more resilient and deepen the Economic and Monetary Union”. Indeed, the Commission proposed a package of measures to this end on 6 December of last year (see EUROPE 11920).
A strong return to growth in Greece. Growth stood at 1.6% of GDP in Greece last year, with growth in each of the first three quarters of the year 2017. This is the first time since 2006 that the Hellenic Republic has seen growth in three quarters in a row.
“Today’s forecasts confirmed the Greek recovery, which is in our view solid”, Moscovici said.
Economic growth is expected to remain considerable in 2018 and 2019, as the Commission is predicting a rate of 2.5% of GDP for both years, taking account of such factors as good news on the employment front (unemployment dropping by 2.7% between October 2016 and 2017) and a return of confidence.
The third Greek bailout plan is logically expected to conclude in August of this year, with a clean break from the financial assistance programme being the approach favoured by the Greek government (see EUROPE 11942).
Catalan crisis the principal risk to Spanish growth. The Commission takes note of growth in Spain, which stood at 3.1% of GDP in 2017. This performance is higher than predicted in the autumn, due to strong growth in the second half of 2017. Although lower Spanish growth is expected to continue in 2018 and 2019, at rates of 2.6% of GDP and 2.1% of GDP respectively.
Even so, the political crisis in Catalonia, which has still not been resolved definitively, may have a significant impact over the coming months, although the Commission considers that its consequences for growth “have remained contained” so far.
Spain, furthermore, is expected to record a deficit in nominal terms well below 3% of GDP this year, and will probably come out of the excessive deficit procedure in 2018 (see EUROPE 11910).
Trade driving growth in the UK. According to preliminary estimates, British growth was in the order of 1.8% of GDP last year. Quarterly growth began to decline in the second half of 2016, due for instance to a downturn in growth in private consumption, dictated by inflation that was the natural consequence of the depreciation of the pound sterling, in the framework of Brexit. However, this depreciation has served exports well (6.8% average growth over the first three quarters of 2017), hence the net external trade surplus.
This situation in the UK is expected to allow growth to stay at a rate of 1.4% of GDP in 2018.
However, there are uncertainties over the outcome of the Brexit negotiations, particularly the future transition period. Working on the basis of purely technical assumptions of status quo in 2019, the Commission anticipates that growth in the UK will stand at 1.1% of GDP in the year.
Towards durable growth in France. Driven by an increase in investments, French GDP will continue to grow in 2017, reaching a rate of 1.8% in nominal terms, following growth above 0.5% of GDP over five consecutive quarters. Economic confidence indexes are coming close to pre-crisis levels and the Commission anticipates growth of 2.0% of GDP in 2018 and 1.8% in 2019. At the same time, the unemployment rate is expected to continue to fall.
Although the growth figures are encouraging, the matter of government deficit is still topical. If this is confirmed at 2.9% in 2017 and tending towards 2.8% for 2018, France, like Spain, should come out of the excessive deficit procedure this year. Despite a better growth performance than anticipated, Eurostat’s decision on how to account for the repeal of the French tax on dividends in the deficit for 2017, will be of decisive importance.
Moscovici said that he considered it “possible and desirable” that no more countries in the Eurozone would still be under excessive deficit procedure by next spring.
If they do come out of excessive deficit procedure, the French authorities will have to start in 2018 to focus on reducing the structural deficit, in line with the rules of the ‘preventative’ plank of the Stability and Growth Pact.
Growth still strong in Germany. Economic growth stood at 2.2% of GDP in 2017 in Germany, up 0.3% on 2016. Amongst other things, this figure is the consequence of strong private consumption, driven by a low unemployment rate, a high level of investment and significant external demand.
Stressing that economic confidence is still high in the country, the Commission predicts German growth of 2.3% of GDP in 2018 and above 2.0% of GDP in 2019. (Original version in French by Lucas Tripoteau)