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Eurozone Economy Seen Cooling as Risks to Growth Mount

The eurozone economy will cool over 2018 and the coming years as global demand for its exports wanes, with a sharper slowdown possible if the U.S. economy overheats or trade tussles escalate, the European Union said Thursday.

The EU still expects the gross domestic product of the 19 countries that use the euro to grow by 2.1% this year, having expanded by 2.4% in 2017, which was the currency area’s best year in a decade. The bloc cut its 2019 growth forecast to 1.9% from 2% in July and now projects a further slowdown to 1.7% in 2020.

It highlighted a number of threats to that scenario, chiefly the possibility that the U.S. economy grows too rapidly in response to cuts in taxes and increased government spending, prompting the Federal Reserve to raise its key interest rate more rapidly than currently anticipated. The EU warned that this could spread “turmoil” through global financial markets and weaken growth in developing and developed economies.

“Barring major shocks, GDP should continue to grow at a moderate pace,” said Marco Buti, head of the European Commission’s economics department. “The road ahead is however fraught with uncertainty and numerous, interconnected risks.”

The EU also raised concerns that a rapidly expanding U.S. economy will suck in more imports, widening the country’s trade deficit and prompting fresh tariff increases.

“Should extensive new tariff and non-tariff barriers emerge and spread, the negative impact on international trade and global growth would be sizable,” Mr. Buti said.

The EU also warned of threats to growth from within the bloc, highlighting increased borrowing by Italy’s new government and the possibility that the U.K. could leave the bloc in March abruptly and without a new trade agreement.

“Uncertainty about the outlook for public finances in Italy has led to higher interest spreads, and the interaction of sovereign debt with the banking sector is still of concern,” Mr. Buti said.
Source: Dow Jones

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