EU Spring Forecasts 2017: Growth outlook for the eurozone upgraded

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Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs.

Summary:

  • Eurozone to benefit from a relatively stable and upbeat global economic outlook
  • Eurozone GDP growth for 2017 and 2018 upgraded slightly higher from the Winter forecasts
  • Brexit, the US, and the European banking sector posed risks to the economic recovery in the EU
  • Inflation forecast to rise in 2017, but expected to fall a year later
  • Private consumption expected to slow while investment to remain steady
  • Eurozone unemployment to fall to 7.7% by 2018

The European Commission’s spring forecasts painted a rosy picture for the growth of the EU. Noting that the European economy was in its fifth year of recovery and it is expected to continue at a steady pace in 2017 and 2018 despite headwinds from the EU’s negotiations with the UK and the uncertain policies by U.S. President Trump.

The spring forecasts released last week on 11 May showed that the European Commission expects the growth of the gross domestic product (GDP) in the 19-nation Eurozone to rise 1.7% this year and 1.8% in 2018. The growth forecasts were slightly higher from 1.6% and 1.8% from the Winter forecasts.

The first quarter GDP report puts the Eurozone’s annualized GDP growth rate at 1.7%, slightly below 1.8% growth that was achieved the year before.

GDP growth in the 28-nation European Union as a whole is projected to remain steady at 1.9% into the next two years.

GDP forecasts euro area: EU Spring Forecast Report, May 2017
GDP forecasts euro area: EU Spring Forecast Report, May 2017

Part of the upbeat prospects comes on the back of an improvement in the global economy with China and the United States largely contributing to lifting the growth prospects in the EU. Despite the optimism, the European Commission cautioned that uncertainty in the global economic outlook still remained elevated.

The global growth excluding the EU is expected to rise 3.7% in 2017 and 3.9% in 2018 and was unchanged from the Winter forecasts. The outlook for the U.S. economy was also unchanged with the report noting that the net exports from the EU is expected to remain neutral to GDP growth over the two-year period.

The European commission flagged risks from Brexit, President Trump’s policies on world trade and the weakness in the European banking sector as risks that could impact the recovery.

EU Economy Commissioner Pierre Moscovici said that “the euro area recovery in jobs and investment remains uneven” despite some of the risks dissipating.

On inflation, the European Commission said that despite the surge in headline consumer prices in the recent months, inflation is not expected to reach the ECB’s 2% target anytime soon.

Inflation breakdown and forecasts: EU Spring Forecast Report, May 2017
Inflation breakdown and forecasts: EU Spring Forecast Report, May 2017

The central bank was seen vigorously defending its easy monetary policy amid recent signs of an increase in consumer prices. This has led to lawmakers from EU member nations such as Germany and Netherlands to call for the ECB to tighten monetary policy.

ECB officials have remained cautious so far as the current QE program at €60 billion a month in bond purchases is expected to continue through the end of December 2017.

The European Commission expects inflation to average 1.6% in 2017 and rise just 1.3% in 2018 as the effects of higher oil prices fade. Private consumption is also expected to take a backseat after rising at the fastest pace in over 10-years in 2016.

The European commission expects employment rate to fall by 2018 on rising domestic demand and structural reforms alongside government policies that support job creation. While the unemployment rate is expected at 9.4% in 2017, it is expected to fall to a 9-year low by 2018 at 8.9%.

The unemployment rate in the whole of EU is expected to see a similar trajectory with the forecasts showing the EU unemployment rate at 8% in 2017 and 7.7% in 2018.

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