European Commission Spring 2019 Economic Forecast: Growth continues at a more moderate pace

The European economy is forecast to continue expanding for the seventh year in a row in 2019, with real GDP expected to grow in all EU Member States. As global uncertainties continue to weigh, domestic dynamics are set to support the European economy. Growth is expected to gather pace again next year.

The recent slowdown in global growth and world trade, together with high uncertainty about trade policies, is weighing on prospects for Gross Domestic Product (GDP) growth in 2019 and 2020. The continued weakness of the manufacturing sector also plays a role, especially in those countries encountering specific problems in the automobile industry.

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said:

“The European economy is showing resilience in the face of a less favourable external environment, including trade tensions. Growth is set to continue in all EU Member States and pick up next year, supported by robust domestic demand, steady employment gains and low financing costs. Yet risks to the outlook remain pronounced. On the external side, these include further escalation of trade conflicts and weakness in emerging markets, in particular China. In Europe, we should stay alert to a possible ‘no-deal Brexit’, political uncertainty and a possible return of the sovereign-bank loop.”

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said:“The European economy will continue to grow in 2019 and 2020. Growth remains positive in all our Member States and we continue to see good news on the jobs front, including rising wages. This means that the European economy is holding up in the face of less favourable global circumstances and persistent uncertainty. Nonetheless, we should stand ready to provide more support to the economy if needed, together with further growth-enhancing reforms. Above all, we must avoid a lapse into protectionism, which would only exacerbate the existing social and economic tensions in our societies.”

GDP slowdown to bottom out in 2019

As global trade and growth are expected to remain weaker this year and next compared to the brisk pace seen in 2017, economic growth in Europe will rely entirely on domestic activity. More Europeans are now in work than ever and employment growth is expected to continue, albeit at a slower pace. This, together with rising wages, muted inflation, favourable financing conditions and supportive fiscal measures in some Member States, is expected to buoy domestic demand. All in all, GDP is forecast to grow by 1.4% in the EU this year and 1.2% in the euro area.

In 2020, adverse domestic factors are expected to fade and economic activity outside the EU to rebound, supported by easing global financial conditions and policy stimulus in some emerging economies. GDP growth next year is forecast to strengthen slightly to 1.6% in the EU and 1.5% in the euro area.

The figures for 2020 also benefit from a higher number of working days that year.

Unemployment continues to fall

Labour market conditions continued to improve despite the slowdown in growth towards the end of 2018. While still too high in certain Member States, unemployment in the EU – at 6.4% in March 2019 – has fallen to the lowest rate recorded since the start of the monthly data series in January 2000. Unemployment in the euro area is currently at the lowest rate since 2008.

Over the next two years, the rate of employment growth is expected to slow as the impact of more moderate growth takes its toll and temporary fiscal measures in some Member States fade.

The unemployment rate is expected to continue to fall in the EU in 2019 and is set to reach 6.2% in 2020. The unemployment rate in the euro area is forecast to fall to 7.7% in 2019 and to 7.3% in 2020, lower than it was before the crisis began in 2007.

Inflation to remain subdued

Inflation in the EU is expected to fall to 1.6% this year before rising to 1.7% in 2020. Euro area headline inflation dropped from 1.9% in the last quarter of 2018 to 1.4% in the first quarter of this year due to lower increases of energy prices. With energy price inflation expected to moderate further in the coming quarters and little sign that higher wage growth has been fuelling underlying price pressures, euro area inflation (Harmonised Index of Consumer Prices) is forecast to reach 1.4% in both 2019 and 2020.

Public debt to continue falling despite lower growth

Debt-to-GDP ratios are forecast to fall in most Member States in 2019 and 2020 as deficits remain low and nominal GDP growth should remain higher than the average interest rate on outstanding debt. Assuming no policy change, the debt-to-GDP ratio of the EU is forecast to fall from 81.5% in 2018 to 80.2% in 2019 and 78.8% in 2020. The euro area’s aggregate debt-to-GDP ratio should fall from 87.1% in 2018 to 85.8% in 2019 and 84.3% in 2020.

The aggregate government deficit of the EU is expected to rise from 0.6% of GDP in 2018 to 1% in both 2019 and 2020. It is also expected to rise in the euro area, from 0.5% of GDP in 2018 to 0.9% in 2019 and to remain unchanged in 2020, assuming no policy change. The increase this year is mainly due to slower GDP growth and expansionary fiscal policies in some Member States.

Risks to the outlook remain prominent

Downside risks to the outlook remain prominent. The risk of protectionist measures worldwide and the current slowdown in world GDP growth and trade could turn out to be more persistent than expected, particularly if growth in China disappoints.

In Europe, risks include that of a ‘no-deal’ Brexit and the possibility that temporary disruptions currently weighing on manufacturing could prove more enduring. There is also the risk that a rise in political uncertainty and less growth-friendly policies could result in a pull-back in private investment.

On the positive side, private consumption and investment in the EU could prove more resilient than expected, particularly if confidence among business and consumers was less sensitive to uncertainty and domestic headwinds, and if it were accompanied by stronger-than-assumed fiscal policy measures in countries with fiscal space and growth enhancing reforms.

For the UK, a purely technical assumption for 2019

In the light of the process of the withdrawal of the UK from the EU, projections for 2019 and 2020 are based on a purely technical assumption of status quo in terms of trading patterns between the EU27 and the UK. This is for forecasting purposes only and has no bearing on the process underway in the context of Article 50.