In its Summer Interim Economic Forecast, presented on Wednesday 10 July, the European Commission expects the EU economy to continue to grow this year and the following one, but slightly lowers the outlook for the euro area in 2020 due to external and internal economic and political uncertainties.
“The European economy continues to resist a less favourable external environment”, said Pierre Moscovici, Commissioner for Economic and Financial Affairs, at a press conference, before noting that all EU Member States are expected to experience positive growth rates in 2019 and 2020. “There are significant risks to our [economic] forecasts”, he however added.
Yet the European Commission is not sounding the alarm at the beginning of the summer, since growth across the European Union continues for the seventh consecutive year.
For this year, the institution forecasts GDP growth of 1.4% in the European Union and 1.2% in the euro area. For next year, these growth rates are expected to be 1.6% and 1.4%. It is the latter rate that is slightly lower than the Spring Economic Forecast, since the Commission was then expecting GDP growth in the euro area to reach 1.5% in 2020 (see EUROPE 12249/6).
Inflation forecasts have also been revised downwards. Inflation is now forecast at 1.3% in the euro area for both 2019 and 2020 and 1.5% and 1.6% respectively in 2019 and 2020 in the EU.
While growth in the first quarter “positively surprised” the European Commission and Mr Moscovici, the institution expects this momentum to be “fully offset” by the end of the year. This slowdown in economic expansion will likely be due in part to the weakness of the manufacturing sector and the slowdown in foreign trade.
The Commissioner for Economic and Financial Affairs added that the main driver of growth remained domestic demand, “supported by accommodative monetary policies”.
The Commission also identifies several risks to the European Union's economies. Internally, the uncertainties related to the United Kingdom's exit from the EU and its economic impact are still significant. The weakness, also, of the manufacturing sector and declining business confidence, partly linked to external risks, could have a negative impact on growth. Externally, trade tensions between the United States and China, uncertainties in US trade policy and geopolitical unknowns in the Middle East are all significant economic risks.
In light of these risks, the Commission therefore recommends to “further strengthen the resilience” of the European Union's economies in the coming months. The aim is to implement socio-economic reforms and consolidate public finances on the basis of the institution's recommendations (see EUROPE 12269/2).
Germany. Germany's GDP growth is expected to be one of the lowest in the European Union this year, reaching 0.5%.
The Commission notes that economic activity picked up in early 2019 compared to the end of last year. The automotive market, investments and private consumption have all contributed to this expansion.
On the other hand, the forecasts for the end of the year are less optimistic, mainly due to weak external demand and industrial activity.
For 2020, GDP growth projected today is 1.4%, or 0.1 percentage point lower than what had been suggested in the Spring Economic Forecast.
France. Like Germany, the Commission has also reduced its 2020 growth forecast for France by 0.1 percentage points. GDP is expected to increase by 1.4% next year (1.5% in the Spring Economic Forecast), compared to 1.3% this year.
The institution notes that domestic demand and household consumption are expected to be the main growth drivers in 2019 and 2020. Business investment, on the other hand, is expected to decline, mainly due to external uncertainties and the slowdown in economic activity compared to 2018, when GDP growth reached 1.7%.
On the French side, what will also be observed in the coming months will be the budgetary trajectory, in particular the structural effort for 2019 and 2020.
Italy. For Italy, the European Commission's growth forecasts for 2019 and 2020 remain unchanged compared to the Spring Economic Forecast, with GDP growth of 0.1% and 0.7% respectively.
That said, potential growth for 2019 remains below what was initially envisaged by the Italian authorities at the end of last year (see EUROPE 12163/1). Last December, they predicted a GDP growth of 1% in 2020 and even 1.5% in October.
Moreover, the risks to growth in 2020, despite a forecast of renewed economic expansion, remain significant for the European Commission, particularly with regard to fiscal policy.
The Italian situation will be observed with particular attention in the coming months. While Rome has prevented the Commission from recommending to the EU Council that it open an excessive deficit procedure based on debt criteria on 3 July (see EUROPE 12288/10), its European partners will examine the budgetary trajectory for 2019 and 2020, especially with regard to the structural deficit (see EUROPE 12291/4). “These reforms must be carried out”, Mr Moscovici said, before saying he was keen to see Giuseppe Conte's government present a draft budget for 2020 in line with the rules of the Stability and Growth Pact.
Greece. Finally, Greece is also receiving particular attention from the European Commission and other EU countries.
The institution forecasts GDP growth of 2.1% in 2019 (2.2% in the Spring Economic Forecast) and 2.2% in 2020. If this is the case, Greece would be the only euro area country in which growth would accelerate between 2018 and 2019.
These figures should still be seen in a particular context, namely the enhanced surveillance that Athens has been undergoing since the release of last year's third and final financial assistance plan (see EUROPE 12077/1). The Greek authorities must therefore maintain a primary surplus (excluding debt service) of 3.5% of GDP by 2022.
The actions of the new right-wing government and its impact in terms of growth and fiscal policy will be closely monitored by Greece's European partners (see EUROPE 12292/8). “We will engage in a relationship with this government that I want to be constructive, positive”, Moscovici said. (Original version in French by Lucas Tripoteau)