The increased uncertainties regarding global trade politics, paired with industrial production slowdown and unrest, have affected the growth assumptions of the European Commission.
At its Winter Interim Forecast, the EU executive revising downwards its estimates for inflation in the Eurozone for 2020, which is now expected to be lower than the forecast by the European Central Bank and will likely complicate the bank’s plan for an interest rate hike this year.
The Commission said Eurozone growth will slow to 1.3% this year, down from 1.9% in 2018, but is expected to slightly rebound in 2020 to 1.6%. The Commissioner for Economic, Financial Affairs, Customs and Taxation, Pierre Moscovici, has underlined that despite the downward trend, in 2017 the Eurozone experienced its most robust growth in the last decade. He attributed the slowdown in 2018 to a natural economic “correction” after a substantial uptick the year before.

The new estimates are less optimistic than the Commission’s previous forecasts which were released in November 2018 when Brussels expected the Eurozone to grow by 1.9% this year and 1.7% in 2020. Overall, growth in the EU is expected to slow to 1.5% this year, a significant drop from the 2.1% that was registered in 2018.

The trend is supposed to reverse slightly next year when the bloc is forecast to expand by 1.8%.

According to Moscovici, the EU-27 is poised to continue growing with the bloc expected to post its seventh consecutive year of expansion. That said, several of the EU’s larger members are expected to experience a noticeable slowdown in their economies with both France and Germany becoming increasingly concerned about their budget policies and Italy officially entering into a recession.

Further compounding the more pessimistic outlook is the increased uncertainty regarding international trade policies, most notably between the US and China. A declining trend in global manufacturing output has also translated into weaker global trade growth, according to the EU executive.

Improving labour market conditions, low financing costs, and a slightly expansionary fiscal policy over the course of the next year should allow for more positive, albeit moderate, results by the end of 2019, Moscovici said.

The EU’s largest economy, Germany, is expected to slow even more steeply than the Commission’s previous estimates of 1.8% in 2019. Instead, the German economy will most likely grow by only 1.1% this year from 1.5% in 2018.

France, Italy, Spain, and The Netherlands are also forecast to see their economies slow in 2019, with Italy expected to have the worst economic performance in the EU with just 0.2% growth in the next eleven months.

“In 2019, annual real GDP growth is forecast to fall to 0.2%, sizeably less than anticipated in the autumn forecast,” the Commission said in reference to Italy’s GDP growth, which it said was so affected by “policy uncertainty” that it had to revise down its forecast from several months ago by a full percentage point.

“A worse-than-expected cyclical slowdown in 2018, amplified by global and domestic policy uncertainty” have all contributed to a “substantially less favourable investment outlook”.