The European economy is entering its fourth year of recovery as growth continues at a moderate rate, driven mainly by consumption. However, the global economy is struggling with major challenges, which increasingly risks hindering the European economic growth.
Low oil prices, favourable financing conditions and the euro’s low exchange rate are factors supporting growth said Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, presenting the EU Economic forecast for the winter 2016. Moreover, the increase in public spending for the integration of migrants is considered a short term strong factor of economic growth.
Overall, the Commission’s winter forecast shows that the overall growth outlook has changed little since last autumn as it will probably remain stable at 1.9% this year and rise to 2.0% next year. Whereas growth in the Eurozone was of 1.6% in 2015, it is expected to climb to 1.7% in 2016 1.9% the following year.
External challenges putting the EU economy at risk are mainly the decline of the Chinese economic growth as well as of other emerging market economies such as Russia and Brazil; the geopolitical tensions due to conflicts in the Middle East; and the weak global trade due to the interest-rate cycle in the US and the dollar’s appreciation as well as the sharp drop in a wide range of commodity prices. A further fall in oil prices could also have a negative effect on oil-exporting countries and lower demand for EU exports.
On the domestic side risks have also increased. They include popular reactions to migration and security threats, which could put further pressure on the EU border-free Schengen system as well as uncertainty surrounding further implementation of structural reforms.
If there will still be large differences between member states, European economies are all expected to expand by 2017 thanks to private consumption, which is higher than expected and will continue to be the driver of growth. Indeed, the modest rise of employment should increase demand. Unemployment rates in Europe are expected to fall from 9.5% in 2015 to 9.0% this year and 8.7% next.
Regarding national deficits, they are further declining, thanks to stronger economic activity and to lower interest expenditure. The general government deficit is expected to have fallen to 2.5% of GDP in 2015 and should fall further to 2.2% of GDP this year and 1.8% of GDP in 2017.
Commissioner Moscovici concluded by saying:
“The weak and challenging global environment reinforces the need a more resolute rebalancing towards domestic demand and particularly towards investment. (…) We need to use all available tools to increase Europe’s growth potential and to ensure a sustainable long lasting recovery. The economic and political uncertainty hampering investment is one of the priorities for the policy makers to tackle and therefore it is also a priority for this Commission.”