In response to the slowdown in economic growth since autumn 2018, the European Commission has significantly lowered its growth forecasts for the euro area and the European Union at Twenty-Seven post-Brexit levels on Thursday 7 February, from 1.9% to 1.3% of GDP and from 2.0% to 1.5% (the same in an EU of Twenty-Eight) of GDP respectively compared to its autumn 2018 forecast.
The downward revision is particularly marked for Italy, whose GDP growth has been reduced from 1.2% to 0.2% in 2019. These new forecasts raise questions about the fulfilment of Italy's budgetary commitments for this year (see EUROPE 12165).
In contrast, the recovery continues for Greece, the only euro area country with Malta for which growth forecasts have been revised upwards.
The Commissioner for Economic and Financial Affairs, Pierre Moscovici, has drawn several lessons from these new forecasts. Economic fundamentals remain "robust", with growth remaining positive in all Member States in 2019. According to him, the Commission believes in a "slight rebound" at the end of 2019 and an "acceleration" in 2020. Next year, GDP growth is expected to reach 1.6% in the euro area and 1.8% in the EU of Twenty-Seven (1.7% in the EU of Twenty-Eight).
For 2019, downside risks now clearly dominate, with strong international trade tensions, but also "internal factors" in the EU such as "the decline in car production in Germany, social tensions in France and strong uncertainty about Italy's fiscal policy", Mr Moscovici stressed.
Good news includes employment figures that are "on the up and up", according to Moscovici, who reported a highest rate ever seen in the euro area". Rising employment stimulates wage growth, which in turn drives household consumption, the "main engine of growth" in the euro area, he observed.
And investment should continue to be "supported" thanks to favourable financing conditions", the "very gradual" normalisation of the ECB's accommodating monetary policy, and the fall in energy prices (oil price fall estimated at -14% in 2019 compared to 2018).
On the inflation front, the Commission is also reducing its forecasts for 2019, with annual price increases now standing at 1.4% in the euro area and 1.6% in the EU of Twenty-Seven (same for the EU of Twenty-Eight). According to the Commission, the increase in wages will allow a gradual increase in core inflation (excluding energy and food prices) this year.
Italian uncertainties. While it entered into a technical recession at the end of 2018 (two successive quarters of negative growth) due to flagging consumption and investment, the Italian economy is expected to stagnate this year (+0.2% of GDP) and recover slightly in 2020 (+0.8%).
Mr Moscovici refused to draw any conclusions from this regarding Rome's compliance with its budgetary commitments (nominal public deficit at 2.04% of GDP), while the Italian budget for 2019 is based on a growth forecast of 1.0% of GDP. Believing that there was no reason to rush, he indicated that conclusions will be drawn in due course in the spring, when the budgetary data will be refined and validated, in accordance with the budgetary process of the 'European Semester'.
Nevertheless, the Commissioner noted that "in any event, it does not seem that the forecast Keynesian expansion is materialising", despite the fall in the costs of refinancing the Italian debt. “This should give us food for thought," he said, as the Italian government is implementing its costly campaign promises with the creation of a minimum citizen's income and pension reform.
In Rome, the Italian government announced on Thursday that it was keeping its own growth forecasts unchanged. According to the Italian Finance Minister, Giovanni Tria, the Commission has only taken note of a worse than expected economic situation.
The downward revision of economic growth is also strong in Germany, where GDP growth is expected to decline from 1.8% to 1.1% in 2019.
In France, the slowdown appears to be real, but less pronounced, with the Commission's growth forecast for the country going from 1.6% to 1.3% of GDP. For Mr Moscovici, the consumption support measures decided at the end of 2018 by the French government under pressure from the 'yellow vest' movement will fuel private consumption. He made a distinction between these measures and those decided by the Italian government.
He distinguished the French budgetary situation, which forecasts a public deficit above 3% of GDP (see EUROPE 12163), and the Italian budgetary situation, with a deficit certainly below 3% of GDP, but a high public debt combined with low growth.
Among the good students in the euro area, the Commissioner mentioned Spain, whose growth is still expected to reach 2.1% of GDP in 2019, and Greece (+2.2% of GDP). In the euro area, the strongest growth will be observed in Malta (+5.2%), Ireland and Slovakia (+4.1%) and Cyprus (+3.3%). In the rest of the EU, the best performances are expected in Romania (+3.8%), Bulgaria (+3.6%) and Poland (+3.5%).
For the United Kingdom, the Commission's economic forecasts are based on the assumption of unchanged trade relations with the EU. UK growth is expected to reach 1.3% of GDP in both 2019 and 2020.
For more information: http://bit.ly/2MS3qmt. (Original version in French by Mathieu Bion)