There was plenty of positive news – and some notes of caution – from the European Commission’s Spring 2018 Economic Forecast, announced yesterday.
According to the report, growth rates for the EU and the euro area exceeded expectations in017 to reach a 10-year high at 2.4%. Growth is set to remain strong in 2018 and slow onlyslightly in 2019, with growth of 2.3% and 2.0% respectively in the euro area.
The key take-aways: Exports and investments in particular have increased, while private consumption remains steady. Public finances are improving, with no deficits over 3% of GDP. Unemployment is continuing to fall and has now reached pre-crisis levels. On the negative side, the economy is now more exposed to stronger external risk factors.
More good news is that these solid growth figures have enabled a further reduction in government deficit and debt levels. The aggregate deficit for the euro area is now less than 1% of GDP and is forecast to fall under 3% in all euro area Member States this year.
Underlying pressures affect inflation
Consumer price inflation weakened in the first quarter of 2018, but is expected to pick up slightly in the coming quarters, partly due to recent increases in oil prices. Underlying price pressures are also building as a result of tighter labour markets and faster wage growth in many Member States.
Overall, inflation in the euro area is forecast to remain the same in 2018 as in 2017 at 1.5% and then rise to 1.6% in 2019. In the EU, the same pattern is expected, but with inflation forecast to continue at 1.7% this year before rising to 1.8% in 2019.
Increasing risk factors
Finally, amid all this positive news there are some cautionary notes to bear in mind. Recent indicators have reduced the likelihood that European growth will be stronger than anticipated in the short-term. The volatile condition of the financial market is likely to continue for the foreseeable future which can only add to instability.
Looking at external factors, pro-cyclical fiscal stimulus in the US is likely to boost short-term growth, but if US interest rates rise faster than currently predicted this could impact Europe negatively. The recent rise in trade protectionism – such as the much-discussed steel trade tariffs – naturally present a significant risk to the economic outlook, not just in Europe but globally. However, due to its openness, the Commission stresses that the euro area would be particularly vulnerable.
UK outlook uncertain
The forecast does reveal – not surprisingly – a question mark over the prospects for the UK. The projection figures given this week are for all 28 existing Member States, but the ongoing negotiations on the UK’s withdrawal from the EU mean that these are a ‘purely technical’ assumption.
The Commission's next forecast will be the Summer 2018 Interim Economic Forecast in July.
View the full findings of the Spring report.