The euro zone's economic growth is expected to lose some speed this year and to rebound in 2018 while the British economy will nearly halve its expansion by 2018, the European Commission said on Monday, warning of higher political risks.
The EU executive forecast that growth in the 19 countries sharing the euro would slow to 1.6 per cent this year from 1.7 per cent in 2016, but would gain speed in 2018 when its gross domestic product (GDP) is expected to increase by 1.8 per cent.
Growth forecasts were slightly revised up for this year and 2018 from the commission’s previous estimates released in November when euro zone GDP was estimated to grow 1.5 per cent this year and 1.7 per cent in 2018.
The revision was due to “better-than-expected performance in the second half of 2016 and a rather robust start into 2017”, the commission said, noting, however, that “the outlook is surrounded by higher-than-usual uncertainty”.
Cause of uncertainty
The "still-to-be-clarified" intentions of US president Donald Trump in "key policy areas" are seen as the first cause of uncertainty for the EU's economy, which will also face other political risks due to the likely beginning of Brexit negotiations this year and elections in several EU countries, the commission said.
Britain is expected to pay a higher cost for the political uncertainty surrounding its divorce talks from the EU. Its GDP growth is forecast to decline from 2 per cent in 2016 to 1.5 per cent this year, and to further slow down to 1.2 per cent next year.
Britain’s “business investment is likely to be adversely affected by persisting uncertainty while private consumption growth is projected to weaken as growth in real disposable income declines”, the Commission said.
The gloomy forecast on the British economy are, however, better than previously estimated by the commission, which predicted in November that Britain would grow 1.9 per cent last year and only 1 per cent this year. The 2018 forecast is unchanged.
Inflation
Consumer prices in the euro zone are forecast to markedly pick up this year, as inflation will surge by 1.7 per cent from 0.2 per cent last year. The 2017 estimate is higher that the 1.4 per cent inflation growth predicted by the commission in November.
But euro zone inflation is expected to slow again in 2018 to 1.4 per cent and core inflation, which excludes more volatile prices, is set to rise only gradually.
This is still “short” of the European Central Bank’s target of an inflation “below, but close to 2 per cent”, the Commission said.
However, this is not seen as sufficient to keep the ECB's stimulus plan to continue indefinitely. "With inflation picking up from low levels, we cannot expect current monetary stimulus to last forever," the Commission's vice president Valdis Dombrovskis said, urging euro zone states to continue structural reforms.
–(Reuters)
