The European Union, in its latest report released last week on Thursday, said that it expects the economy to cool over 2018 and in the coming years.
The slowdown was attributed due to a decline in global demand. The EU also said that a sharper slowdown would be possible if the U.S. economy overheats or there is increased risk of trade wars.
The quarterly economic forecasts released last week also touched upon Italy and its borrowing plans. The forecast projected that the budget deficit would exceed the ceiling set by the block in 2020.
The forecasts showed that the gross domestic product for the Euro area would expand 2.1% on the year in 2018. This marks a somewhat slower pace of increase after the GDP rose 2.4% in 2017. This was the best pace of growth witnessed in a year.
For 2019, the growth forecasts were lowered to 1.9% from 2.0% that was estimated previously in July. The economy is forecast to slow even further to just 1.7% in 2020.
The report highlighted some threats noting that the most significant risk comes from the U.S. economy overheating. This is expected to happen due to the tax cuts and other fiscal stimuli that could boost spending.
A faster pace of rate hikes than currently anticipated is also cited as one of the risks.
The EU cautioned that such an overheating could spread through the global financial markets hitting growth sharply in both developing and developed economies.
Marco Butti, head of the European Commission’s economics department said that:
“Barring major shocks, GDP should continue to grow at a moderate pace.” He further cautioned that the path ahead was filled with uncertainty and interconnected risks.
The report also raised concerns about the rapidly expanding economic growth in the United States. This is expected to increase the imports while pushing its trade deficit higher. This, in turn, is supposed to prompt officials to push for more trade tariffs.
“Should extensive new tariff and non-tariff barriers emerge and spread, the negative impact on international trade and global growth would be sizable,” Marco Butti said.
The report also cautioned about the risks from within. It cited the increased borrowing by Italy’s new government as well as the dangers of Brexit without a trade agreement in place.
The uncertainty on the public finances for Italy has led to higher borrowing costs. The Italian government is seeking funds to raise spending on welfare programs including benefits and pensions. The government’s budget stands in defiance to the EU’s budget deficit limits.
For Italy, the EU’s report said that the budget deficit would rise to 2.9% of the GDP next year and advance to 3.1% in 2020. This would mark a breach of the upper limit of the budget deficit set by the EU.
IMF also lowers EU growth forecasts
The IMF also released its growth forecasts the same. It reduced the growth outlook for the Eurozone for 2018 and 2019 citing “external environment has become less supportive and is expected to soften further in 2019 owing to slowing global demand, trade tensions, and higher energy prices.”
The IMF projects growth in the eurozone to moderate to 2.3% in 2018 and to 1.9% in 2019.
However, the IMF said that growth is expected to remain above potential in most countries in the Eurozone. The downgrade from the IMF comes following its earlier report in May this year. The IMF had expressed confidence in the eurozone saying that growth would remain strong reaching 2.6% in 2018 and 2.2% in 2019.