Eurozone GDP is expected to grow by 2.1%, 1.9% and 1.7% in 2018, 2019 in 2020 respectively, according to the European Commission's autumn economic forecasts presented on Thursday 8 November, under the 'European Semester' budgetary process.
This expected growth rate for 2018 marks a slight downturn on 2017, when GDP growth stood at 2.4% (see EUROPE 12014).
“Despite the current slowing of the economy and a less promising international environment, the foundations remain solid and should allow economic activity to continue to grow”, said Pierre Moscovici, the Commissioner for Economic and financial Affairs.
At EU level (EU27, not including the United Kingdom), the growth rate is expected to be 2.0% in 2019 and 1.9% in 2020, according to these forecasts.
This overall growth rate masks disparate situations, with an anticipated increase of GDP of 1.2% next year in Italy, compared to 4.5% in Ireland and 4.1% in Slovakia. It is worth noting that the Commission predicts growth for France of 1.6% of GDP in 2019 and 2020, compared to 1.8% and 1.7% for Germany.
Domestic demand is currently the key factor of this growth, which is benefiting from good news on the employment front, plus rising wages and budgetary measures on the part of certain member states. Investment, another growth factor, is set to grow in 2019 in all member states for the first time since 2007.
Risks. External factors, however, will be less favourable and the European economy will face significant external risks that are tending to grow stronger, including global protectionist policy and its impact on international trade, plus the overheating of the US economy.
Internally, uncertainties surrounding the draft Italian budget (referred to elsewhere) and Brexit could have a negative impact on the European economy going forward.
Employment. Moscovici took pains to stress that there is good news on the economic front, referring to continual improvement in the 'employment' plank, with a new all-time record on this point, with the institution predicting an unemployment rate of 6.6% in the EU in 2020, the lowest since the statistics were first published in January 2000.
Here again, the unemployment rate will differ greatly between EU member states. It may stand at 18.2% and 14.4% of the active population next year in Greece and Spain respectively, and 2.5% and 2.9% in the Czech Republic and Poland.
Inflation. A Eurozone inflation rate is expected to be of 1.8% is expected in 2018 and 2019 and 1.6% in 2020, compared to 1.5% in 2017.
For next year, Latvia is expected to see the Eurozone's steepest increase in prices, at 1.7%, whilst the inflation rate in Ireland and Greece is likely to be 1.2%.
Oil prices and the economic climate have helped to stimulate the inflation rate this year.
Government deficit and debt. Although the nominal deficits have continued their downwards trend this year, the decline is expected to stop next year due to slightly expansionary budgetary policies, before falling again in 2020. For instance, the average government deficit rate in the Eurozone is expected to be 0.8% of GDP in 2019, compared to 0.6% of GDP this year, moving up to 0.7% of GDP in 2020. It is worth noting that these rates represented 6.2% of GDP in 2009.
As things currently stand, the nominal deficit rate for Italy will be 2.9% of GDP in 2019, whereas Luxembourg and Malta are expected to record a nominal budgetary surplus of 1.2% of GDP. The Greek primary budgetary surplus (not including servicing of the debt) is, moreover, expected to stand at 3.5% of GDP, which is in line with the terms of the agreement governing Athens' exit from the final financial bailout plan it was under until August (see EUROPE 12077).
Under the heading of debt, the average rate of indebtedness of the Eurozone countries is expected to fall from 86.9% of GDP this year to 84.9% and 82.8% of GDP in 2019 and 2020. Here again, notable disparities are expected, between the anticipated indebtedness rate for next year in Estonia (7.6% of GDP) and Greece (174.9% of GDP) or Italy (131.0% of GDP).
Italy. The subject of Italy was on all lips, with the Eurogroup having called upon Rome on Monday 5 November to submit a new draft budget that complies with the rules of the preventive arm of the Stability and Growth Pact, its first draft having been rejected by the Commission last month (see EUROPE 12130, 12123).
Readers may recall that although Italy is supposed to trim 0.6% of GDP off its structural deficit (not including cyclical effects) next year, the government of Giuseppe Conte anticipates that this will actually increase by 0.8% of GDP (see EUROPE 12117).
In its forecasts, the Commission anticipates that next year's growth rate will be 1.2% of GDP and 1.3% of GDP in 2020. This is a 0.3% less than the figure put forward by Rome.
“Differences are normal between the Commission and the member states. This is not exceptional”, said Moscovici, playing down the situation.
In particular, he explained, this gap may be down to more cautious forecasts on the part of the institution concerning domestic consumption and investments.
Additionally, the Commission anticipates that the structural deficit will grow by 1.2% of GDP next year, or 0.4% more than anticipated by Rome.
But these were only economic forecasts. The Italian authorities must now submit a revised draft budget by 13 November, and the Commission will have to return its opinion eight days later. If this revised draft does not fall within the scope of the Pact, Rome may risk going under an excessive deficit procedure over the debt criterion.
On the Italian Peninsula, the tone has not varied. In a note, the Italian finance minister, Giovanni Tria, dismissed an “incomplete and partial analysis” by the European institution and regretted a “technical deficiency that will not influence continued constrictive dialogue with the Commission”.
France. The situation in France also came in for particular attention. The Commission predicts a growth rate of 1.7% of GDP in 2018, followed by 1.6% of GDP in 2019 and 2020. For 2019, this forecast is slightly lower than the French government's forecast of 1.7%.
But it is the reduction of the structural deficit that will come in for the most attention. With Paris anticipating that this will fall by 0.1% of GDP in 2018, thereby making use of all of the flexibilities offered by the Pact, it would appear that this structural deficit is likely to remain stable, or even increase by 0.05%. For next year, although it is supposed to be reduced by 0.6% of GDP, this reduction is likely to be 0.24% of GDP, with Paris predicting a reduction of 0.3% of GDP. “The structural deficit will certainly be reduced”, Moscovici said. (Original version in French by Lucas Tripoteau)