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  May 11th, 2016 | Written by

EU Spring Economic Forecast: Staying the Course Amid High Risks

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  • The economy in all EU member states is expected to grow next year, albeit unevenly.
  • With the economic performance of trading partners slowing down, the outlook for global growth remains weak.
  • EC VP Valdis Dombrovskis: “Future growth will increasingly depend on the opportunities we create for ourselves.”

The European Commission expects economic growth in Europe to remain moderate. According to its spring forecast, euro area growth is expected to register at 1.6 percent and EU growth at 1.8 percent in 2016.

The spring economic forecast, presented last week by Pierre Moscovici, commissioner for economic and financial affairs, taxation, and customs, shows that economic growth in Europe remains modest. The economy in all member states is expected to grow next year, albeit unevenly.

Unemployment in Europe is expected to fall below the 10-percent mark in 2017. The fiscal outlook is continuing to improve as the general government deficit and the debt-to-GDP ratio will continue to decline gradually in both the euro area and the EU as a whole.

At the same time, with the economic performance of key trading partners slowing down, the outlook for global growth–especially in emerging markets–remains weak. Inflation in the euro area and the EU remains driven by energy prices.

“The economic recovery in Europe continues but the global context is less conducive than it was,” said Valdis Dombrovskis, commission vice president for the euro and social dialogue. “Future growth will increasingly depend on the opportunities we create for ourselves. That means stepping up our structural reform efforts to address long-standing problems in many countries: high levels of public and private debt, vulnerabilities in the financial sector, or declining competitiveness. A decisive policy action to reform and modernize our economies is the only way to ensure strong and sustainable growth, more jobs and good social conditions for our people.”

“Growth in Europe is holding up despite a more difficult global environment,” said Moscovici. “There are signs that policy efforts are gradually delivering more jobs and supporting investment. But we have much more to do to tackle inequality. The recovery in the euro area remains uneven, both between member states and between the weakest and the strongest in society. That is unacceptable and requires determined action from governments, both individually and collectively.”

Euro area net exports are expected to remain a drag on growth in 2016 before turning neutral in 2017. Growth will depend on domestic demand: investment is expected to pick up next year to 3.8 percent in both the euro area and the European Union and private consumption is expected to moderate as the expected rebound in inflation will reduce real income growth.

“Substantial uncertainty surrounds this forecast,” noted Marcovici.

External risks include the possibility that slower growth in emerging markets, particularly China, could trigger stronger spillovers or turn out worse than expected. Uncertainty linked to geopolitical tensions remains high and could affect European economies more negatively than currently expected. Abrupt moves in oil prices or financial market turmoil could also dampen European growth.

Risks associated with domestic EU developments remain considerable, as for instance with regards to the pace of implementation of structural reforms and the uncertainty ahead of the UK’s EU referendum. Conversely, the positive impact from structural reforms could turn out greater than estimated and the transmission of very accommodative monetary policies to the real economy could prove to be stronger than expected.