How optimistic should we be about the EC’s upbeat Eurozone growth forecasts?

The European Commission’s upbeat economic growth forecasts were revealed in Brussels on Wednesday 7th February by the EU Economic Affairs Commissioner Pierre Moscovici.

Mr Moscovici presented a very positive picture as he described how Europe’s economy has entered 2018 in robust health, enjoying growth rates not seen since before the financial crisis.

He also remarked upon a meaningful rise in investment. The European Commission also welcomed strong demand, high capacity utilisation and supportive financing conditions that are set to favour investment over the forecast horizon. Mr Moscovici added: “Economic growth is also more balanced than it was a decade ago – and provided we pursue smart structural reforms and responsible fiscal policies – it can also be more durable. This window of opportunity to reform will not remain open forever: the moment to take the necessary ambitious decisions to strengthen the Economic and Monetary Union is now.”

In 2018, the Eurozone economy grew by 2.4 percent, which is 0.2 percent more than had been expected. It is clear that the European Commission expects this pace of growth to continue. The European Commission is now even more optimistic for 2018 and 2019. Their forecasts show that they expect the Eurozone economy to grow at the fastest pace for a decade. The European Commission’s expectation for 2018 is now growth of 2.3 percent for 2018 and 2 percent for 2019. This is a more favourable forecast than was made even just a few months ago in November.

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, also welcomed the forecasts, saying: “The European economy is outperforming expectations and the robust growth is set to continue into next year. We should continue our work on ensuring that the benefits of this growth are felt by all Europeans. We should use this time to make our economies more resilient and deepen the Economic and Monetary Union.

©European Commission

Several countries, in particular, were singled out for having strong growth prospects in the next two years. The European Commission expects that Germany will have continued good growth, with 2018 likely seeing 2.3 percent in 2018 (a 0.2 percent improvement on a previous prediction) and 2.1 percent in 2019. They expect France to hit 2 percent growth, which would be the first time that has happened since 2011. Spain is also singled out for 2.6 percent growth despite the potential instability the country faces over the bid for Catalan independence.

However, despite this rosy picture, even the European Commission themselves do not want us to get too carried away with our optimism. In their forecasts, the European Commission has explained that they believe we could be entering a period where there are more pronounced risks, and they mentioned the potential for a sharp correction in the financial markets. They also outlined fears that asset prices may be vulnerable to a reassessment of fundamentals and risks that could expose fragilities related to debt overhang in a number of member states.

The European Commission also explained that Eurozone area growth could also be limited by supply-side constraints such as skilled labour shortages hitting the economy earlier than expected. In summary, the European Commission believes that risks to this growth forecast remain broadly balanced, saying: “Economic growth could exceed expectations in the short term as indicated by the high level of sentiment. In the medium term, high global asset prices could be vulnerable to a re-assessment of risks and fundamentals. Downside risks related to the uncertain outcome of the Brexit negotiations remain, as do those associated with geopolitical tensions and a shift towards more inward-looking and protectionist policies.

We also know of course that this exact period being discussed involves Brexit and all the unknown upheaval that could bring with it. There are always other uncertainties globally to be considered at this time, including tensions with North Korea. We should also remember that the forecasts were prepared by the European Commission before we saw the big global market swings of this week and that shock would not have been taken into account as the European Commission prepared these forecasts. Other risks to consider are political factors such as the German coalition talks and the Italian elections, which could impact the economic situation in those countries and beyond.