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Winter 2020 Economic Forecast: Offsetting forces confirm subdued growth

The Winter 2020 Economic Forecast published today projects that the European economy is set to continue on a path of steady, moderate growth. The euro area has now enjoyed its longest period of sustained growth since the euro was introduced in 1999.

The forecast projects that euro area gross domestic product (GDP) growth will remain stable at 1.2% in 2020 and 2021. For the EU as a whole, growth is forecast to ease marginally to 1.4% in 2020 and 2021, down from 1.5% in 2019.

Valdis Dombrovskis, Executive Vice-President for an Economy that works for People, said: “Despite a challenging environment, the European economy remains on a steady path, with continued job creation and wage growth. But we should be mindful of potential risks on the horizon: a more volatile geopolitical landscape coupled with trade uncertainties. So Member States should use this weather window to pursue structural reforms to boost growth and productivity. Countries with high public debt should also shore up their defences by pursuing prudent fiscal policies.”

Paolo Gentiloni, European Commissioner for the Economy, said: “The outlook for Europe’s economy is for stable, albeit subdued growth over the coming two years. This will prolong the longest period of expansion since the launch of the euro in 1999, with corresponding good news on the jobs front. We’ve also seen encouraging developments in terms of reduced trade tensions and the avoidance of a no-deal Brexit. But we still face significant policy uncertainty, which casts a shadow over manufacturing. As for the coronavirus, it is too soon to evaluate the extent of its negative economic impact.”

Growth to remain stable, driven by domestic demand

The external environment remains challenging. However, continued employment creation, robust wage growth and a supportive policy mix should help the European economy maintain a path of moderate growth. Private consumption and investment, particularly in the construction sector, will continue to fuel economic growth. Public investment, especially in transport and digital infrastructure, is expected to increase significantly in a number of Member States. Together with tentative signs of stabilisation in the manufacturing sector, and a possible bottoming out of the decline in global trade flows, this should allow the European economy to continue expanding. At the same time, these factors appear insufficient to shift growth into a higher gear.

A small upward revision to the inflation forecast

The forecast for inflation (Harmonised Index of Consumer Prices) in the euro area has been raised to 1.3% in 2020 and 1.4% in 2021, an increase of 0.1 percentage points for both years compared to the Autumn 2019 Economic Forecast. This reflects tentative signs that higher wages may start passing through to core prices and slightly higher assumptions about oil prices.

In the EU, the forecast for inflation in 2020 has also been raised by 0.1 percentage points to 1.5%. The forecast for 2021 remains unchanged at 1.6%.

Risks to the forecast

While some downside risks have faded, new ones have emerged. Overall the balance of risks continues to remain tilted to the downside.

The ‘Phase One’ trade deal between the US and China has helped to reduce downside risks to some extent, but the high degree of uncertainty surrounding US trade policy remains a barrier to a more widespread recovery in business sentiment. Social unrest in Latin America risks derailing the region’s economic recovery. Heightened geopolitical tensions in the Middle East have raised the risk of conflict in the region.

While there is now clarity on trading relations between the EU and the United Kingdom during the transition period, there remains considerable uncertainty over the future partnership with the UK. The outbreak of the ‘2019-nCoV’ coronavirus, with its implications for public health, economic activity and trade, especially in China, is a new downside risk. The baseline assumption is that the outbreak peaks in the first quarter, with relatively limited global spillovers. The longer it lasts, however, the higher the likelihood of knock-on effects on economic sentiment and global financing conditions. Risks related to climate change, though mainly long-term, cannot be ruled out in the short term.

On the positive side, the European economy could benefit from more expansionary and growth-friendly fiscal policies and enjoy positive spillovers from more benign financing conditions in some euro area Member States.

For the UK, a purely technical assumption

Given that the future relations between the EU and the UK are not yet clear, projections for 2021 are based on a purely technical assumption of status quo in terms of their trading relations. This is for forecasting purposes only and reflects no anticipation or prediction with regard to the outcome of the negotiations between the EU and the UK on their future relationship.

Background

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 29 January. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 4 February. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.

The European Commission publishes two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) each year. The interim forecasts cover annual and quarterly GDP and inflation for the current and following year for all Member States, as well as EU and euro area aggregates.

The European Commission’s next economic forecast will be the Spring 2020 Economic Forecast which is scheduled to be published on 7 May 2020.
Source: European Commission

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