EU says euro­zone growth to slow amid risks from US, Italy, Brexit

Eco­nomic growth across the 19-coun­try euro­zone is ex­pected to mod­er­ate over the next few years amid risks such as Wash­ing­ton’s eco­nomic poli­cies, the Brexit deal and Italy’s high debt

Daily Sabah (Turkey) - - Money -

EURO­ZONE growth is ex­pected to slow in the com­ing years as the bloc faces risks from U.S. eco­nomic poli­cies, Bri­tain’s un­clear di­vorce terms from the EU and free-spend­ing plans in high-debt mem­bers, like Italy, the EU Com­mis­sion said.

In its quar­terly eco­nomic fore­casts re­leased yes­ter­day, the EU ex­ec­u­tive re­vised down its growth es­ti­mates for the euro­zone next year and pre­dicted a pro­tracted slow­down un­til 2020, the last year for which fore­casts are avail­able.

The re­vi­sion, although ex­pected, might com­pli­cate the Euro­pean Cen­tral Bank’s plans to wind down its stim­u­lus pro­gram this year, but in more pos­i­tive news for the ECB the Com­mis­sion fore­cast higher in­fla­tion of 1.8 per­cent this year and next in the bloc. The ECB tar­gets a rate close to 2 per­cent.

Un­der the fore­casts, the euro­zone will grow 2.1 per­cent this year af­ter a 2.4 per­cent ex­pan­sion in 2017. The slow­down will con­tinue next year when growth is ex­pected at 1.9 per­cent, slightly be­low the pre­vi­ous es­ti­mate of 2.0 per­cent. Although all euro­zone states are ex­pected to con­tinue grow­ing, in 2020 the bloc’s econ­omy will fur­ther re­duce the pace of its ex­pan­sion to 1.7 per­cent, the Com­mis­sion said in its first es­ti­mates for that year.

Ger­many, the bloc’s largest econ­omy, is ex­pected to ex­pand by 1.7 per­cent this year af­ter 2.2 per­cent growth in 2017, the Com­mis­sion said, re­vis­ing down its ear­lier es­ti­mate of 1.9 per­cent. Next year Ger­man growth will be 1.8 per­cent in­stead of 1.9 per­cent. It will go back to 1.7 per­cent in 2020.

Growth fore­casts were re­vised down also for France and Italy, the sec­ond- and third-largest economies in the euro zone, with Italy re­main­ing the worst per­former in the com­mon cur­rency area, with fore­cast growth of just 1.1 per­cent this year, 1.2 per­cent next year and 1.3 per­cent in 2020.

Italy’s weak growth is par­tially matched only by Bri­tain, which is not a mem­ber of the euro­zone and will leave the EU in March. The Bri­tish econ­omy is es­ti­mated to ex­pand by 1.3 per­cent this year and by 1.2 per­cent next, in line with pre­vi­ous fore­casts. In 2020 growth is ex­pected to re­main at 1.2 per­cent.

Pro­jec­tions on Bri­tish growth are based on “a purely tech­ni­cal as­sump­tion” given the un­cer­tain out­come of the Brexit ne­go­ti­a­tions, the Com­mis­sion said.

The EU over­all is fore­cast to grow 2.1 per­cent this year, 1.9 per­cent next, and 1.8 per­cent in 2020.

Brexit is one of the risks for the euro­zone and the EU econ­omy that could worsen the fore­casts.

The other main sources of un­cer­tain­ties come from the United States and Italy, ac­cord­ing to the Com­mis­sion’s anal­y­sis.

“The bal­ance of risks to the growth out­look is clearly tilted to the down­side,” eco­nomic af­fairs com­mis­sioner Pierre Moscovici told a news con­fer­ence say­ing that neg­a­tive ef­fects from ex­ter­nal and do­mes­tic risks “cast shad­ows” on the Euro­pean econ­omy. Over­heat­ing of the U.S. econ­omy fu­elled by “pro-cycli­cal fis­cal stim­u­lus” could lead to in­ter­est rates ris­ing faster than ex­pected, which would have nu­mer­ous neg­a­tive “spillover ef­fects” be­yond the United States, the Com­mis­sion said, also warn­ing of risks from trade ten­sions caused by the poli­cies of the Trump ad­min­is­tra­tion and China’s large ex­ports to the United States. The other risk is Italy, whose euroscep­tic gov­ern­ment is pur­su­ing free-spend­ing poli­cies de­spite its high debt, which is es­ti­mated to re­main sta­ble at around 130 per­cent of gross do­mes­tic prod­uct un­til 2020, in­stead of sig­nif­i­cantly de­creas­ing as re­quired by EU fis­cal rules.

“Doubts about the qual­ity and sus­tain­abil­ity of pub­lic fi­nances in highly in­debted Mem­ber States could spill over to do­mes­tic bank­ing sec­tors, rais­ing fi­nan­cial sta­bil­ity con­cerns and weigh­ing on eco­nomic ac­tiv­ity,” the Com­mis­sion said.

Euro­pean Com­mis­sioner for Eco­nomic and Fi­nan­cial Af­fairs, Pierre Moscovici, gives a press con­fer­ence on the Au­tumn 2018 Eco­nomic Fore­cast at the Euro­pean Com­mis­sion in Brus­sels yes­ter­day.

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