EU raises euro-area GDP forecast, says risks are more balanced

by Viktoria Dendrinou, May 11, 2017

• Inflation outlook for 2017, 2018 cut, European Commission says
  Projections back Draghi stance that not time to exit stimulus
• Growth in the euro area will be slightly stronger this year than previously forecast, the European Commission said, adding that some risks to the outlook have eased.

The commission sees the 19-nation economy expanding 1.7 percent this year — up from 1.6 percent forecast in February — and growing 1.8 percent in 2018. In its first set of economic forecasts since the U.K. government triggered its exit from the European Union, the Brussels-based commission said that risks to the currency bloc’s economy have become more balanced, though they remain tilted to the downside.

The commission’s broad assessment, published in Brussels on Thursday, echoes that of the European Central Bank, which also say that risks have become “more balanced.” But its forecasts also support ECB President Mario Draghi’s stance that it’s not yet time to begin withdrawing stimulus. The commission cut its inflation projections and sees consumer-price growth of just 1.3 percent in 2018, well below the ECB’s goal.

The updated economic forecasts come a few days after pro-EU centrist candidate Emmanuel Macron was elected as France’s new president. His victory against anti-euro candidate Marine Le Pen is a shot in the arm for the EU, which has seen a rise in populism across the continent, and follows the earlier defeat of anti-EU candidate Geert Wilder in elections in the Netherlands.

Populist Ideas

“As this forecast goes to press, the tide of populist ideas in Europe may have turned,” Marco Buti, the commission’s chief economist, said in the report.

Even with political risks subsiding, the EU is bracing to deal with President Donald Trump’s more protectionist trade stance in the U.S., while the next two years is set to be dominated by negotiations with the U.K. on its withdrawal from the bloc.

“External risks are linked, for instance, to future U.S. economic and trade policy and broader geopolitical tensions,” the commission said. “China’s economic adjustment, the health of the banking sector in Europe and the upcoming negotiations with the U.K. on the country’s exit from the EU are also considered as possible downside risks in the forecast.”

Unemployment is seen at 9.4 percent this year, and 8.9 percent next year, lower than the previous forecasts, according to the commission’s latest assessment.

It cut its projections for inflation in the euro area to 1.6 percent in 2017 from 1.7 percent previously forecast. For 2018, it sees inflation at 1.3 percent, lower than the 1.4 percent foreseen earlier and below the ECB’s goal of just below 2 percent.

It said price growth will be largely driven by energy costs, “rather than by a durable and self-sustained momentum.”

ECB policy makers are pondering whether and how to communicate a gradual removal of stimulus amid a steadily strengthening economy that has so far showed little signs of generating faster price growth. Speaking at the Dutch Parliament on Wednesday, Draghi said the central bank’s stimulus hasn’t finished the job yet.

“The economic recovery has evolved from being fragile and uneven into a firming, broad-based upswing,” the ECB president said. “Nevertheless, it is too early to declare success.”