Summer 2018 Interim Economic Forecast: Resilient Growth amid increased uncertainty

Dombrovskis 2018_

© European Union , 2018 / Photo: Mauro Bottaro

This article is brought to you in association with the European Commission.

Growth is set to remain strong in 2018 and 2019, at 2.1% this year and 2% next year in both the EU and the euro area.

However, after five consecutive quarters of vigorous expansion, the economic momentum moderated in the first half of 2018 and is now set to be 0.2 percentage points lower in both the EU and the euro area than had been projected in the spring.

Growth momentum is expected to strengthen somewhat in the second half of this year, as labour market conditions improve, household debt declines, consumer confidence remains high and monetary policy remains supportive.

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: “European economic activity remains solid with 2.1% GDP growth forecast for the euro area and the EU28 this year. Nevertheless, the downward revision of GDP growth since May shows that an unfavourable external environment, such as growing trade tensions with the US, can dampen confidence and take a toll on economic expansion. The growing external risks are yet another reminder of the need to strengthen the resilience of our individual economies and the euro area as a whole.”

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Growth in Europe is set to remain resilient, as monetary policies stay accommodative and unemployment continues to fall. The slight downward revision compared to the spring reflects the impact on confidence of trade tensions and policy uncertainty, as well as rising energy prices. Our forecast is for a continued expansion in 2018 and 2019, although a further escalation of protectionist measures is a clear downside risk. Trade wars produce no winners, only casualties.”

Fundamentals remain solid but growth is set to moderate

The fundamental conditions for sustained economic growth in the EU and the euro area remain in place. The moderation in growth rates is partly the result of temporary factors, but rising trade tensions, higher oil prices and political uncertainty in some Member States may also have played a role.

Globally, growth remains solid but rates are becoming more differentiated across countries and regions.

Inflation forecast driven higher by energy prices

As a result of the rise in oil prices since the spring, inflation this year is now forecast to average 1.9% in the EU and 1.7% in the euro area. This represents an increase of 0.2 percentage points in both areas since spring. The forecast for 2019 has been raised by 0.1 percentage points for the euro area to 1.7% but remains unchanged at 1.8% for the EU.

There are significant downside risks to this forecast

While the recent strong economic performance has proven to be resilient, the forecast remains susceptible to significant downside risks, which have increased since spring.

The forecast baseline assumes no further escalation of trade tensions. Should tensions rise, however, they would negatively affect trade and investment and reduce welfare in all countries involved. Other risks include the potential for financial market volatility linked to, inter alia, geopolitical risks.

For the UK, a purely technical assumption for 2019

Given the ongoing negotiations on the terms of the UK withdrawal from the EU, our projections for 2019 are based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK. This is for forecasting purposes only and has no bearing on the talks underway in the context of the Article 50 process.

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 28 June. For all other incoming data, this forecast takes into consideration information up until 3 July.

As of this year, the European Commission has reverted to publishing two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) each year, instead of the three comprehensive forecasts in winter, spring and autumn that it has produced each year since 2012. The interim forecasts cover annual and quarterly GDP and inflation for the current and following year for all Member States and the euro area, as well as EU aggregates. This change is a return to the Commission’s previous pattern of forecasts and brings the Commission’s forecast schedule back into line with those of other institutions (e.g. the European Central Bank, International Monetary Fund, Organisation for Economic Co-operation and Development).

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