Autumn 2017 Economic Forecast: continued growth in a changing policy context

November 13, 2017.

    The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%). The EU economy as a whole is also set to beat expectations with robust growth of 2.3% this year (up from 1.9% in spring).
    According to its Autumn Forecast released today, the European Commission expects growth to continue in both the euro area and in the EU at 2.1% in 2018 and at 1.9% in 2019 (Spring Forecast: 2018: 1.8% in the euro area, 1.9% in the EU).
    Growth has surpassed expectations but is forecast to ease somewhat
    The European economy has performed significantly better than expected this year, propelled by resilient private consumption, stronger growth around the world, and falling unemployment. Investment is also picking up amid favourable financing conditions and considerably brightened economic sentiment as uncertainty has faded. The economies of all Member States are expanding and their labour markets improving, but wages are rising only slowly.
    A changing policy context
    Although the cyclical recovery has now been underway for 18 uninterrupted quarters, it remains incomplete, with for instance still significant slack in the labour market and untypically low wage growth. GDP growth and inflation are therefore still dependent on policy support. The European Central Bank has kept its monetary policy very accommodative while some other central banks around the world have started raising interest rates. A number of euro area Member States are expected to adopt expansionary fiscal policies in 2018 but the overall fiscal stance of the euro area is expected to stay broadly neutral.
    Unemployment continues to fall but slack remains
    Job creation has been sustained and labour market conditions are set to benefit from the domestic-demand driven expansion, moderate wage growth, and structural reforms implemented in some Member States. Unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, as the total number of people employed climbs to a record high. Over the next two years, unemployment is set to decrease further to 8.5% in 2018 and 7.9% in 2019. In the EU, the unemployment rate is projected at 7.8% this year, 7.3% in 2018 and 7.0% in 2019. Job creation is expected to moderate, as temporary fiscal incentives fade in some countries and skill shortages emerge in others.
    Inflation outlook subdued amid sluggish wage growth
    The headline consumer price inflation rate has fluctuated over the first nine months of the year under the influence of energy base effects. Core inflation, which excludes energy and unprocessed food prices, by contrast, has been rising but remains subdued, reflecting the impact of a prolonged period of low inflation, weak wage growth as well as remaining labour market slack. Overall, inflation is expected to average 1.5% in the euro area this year and is expected to dip to 1.4% in 2018 before climbing up to 1.6% in 2019.
    Public finances benefit from improved cyclical conditions
    Public finances in the euro area are forecast to improve more than was expected in the spring, mostly thanks to the pick-up in growth. The headline government balance is expected to improve in almost all Member States. Under a no-policy-change assumption, the euro area general government deficit-to-GDP ratio is expected to fall to 0.8% in 2019 (1.1% in 2017 and 0.9% in 2018), while the debt-to-GDP ratio is forecast to decline to 85.2% (89.3% in 2017 and 87.2% in 2018).
    Risks are broadly balanced
    The risks that economic developments could turn out better or worse than forecast are broadly balanced. The main downside risks are external, relating to elevated geopolitical tensions (e.g. on the Korean peninsula), possibly tighter global financial conditions (e.g. due to an increase of risk aversion), the economic adjustment in China or the extension of protectionist policies. In the European Union, downside risks relate to the outcome of the Brexit negotiations, a stronger appreciation of the euro, and higher long-term interest rates. By contrast, diminishing uncertainty and improving sentiment in Europe could lead to stronger-than-forecast growth, as could stronger growth in the rest of the world.