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Bethan Wilkins

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AHDB Pork Market Intelligence

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EU economic overview and forecast

Home \ Prices & Stats \ News \ 2016 \ May \ EU economic overview and forecast

With the EU Spring Economic Forecast having been published this month, it is timely to review the economic environment for agriculture and the economic forecast it delivers for the months ahead.

 

In the EU, the economy continues to expand modestly. Low oil prices have given the economy an unexpected boost, raising real incomes and resulting in stronger private consumption. The relatively low exchange rate of the euro has also helped drive growth by making EU export prices more favourable. However, the oil price has recovered, and the effects of these factors will soon have filtered through the economy. Private consumption growth, the main driver of growth within the EU, is forecast to slow next year, only partially offset by a small growth in real wages. Support for growth from the ECB will continue, with expansionary monetary policy continuing for an extended period of time.

Slow core inflation which reflects the output gap is still present. GDP has risen above pre - 2008 levels, but it took longer than many other advanced economies to do so. The level of investment remains depressed and unemployment far too high. This investment shortfall, structural unemployment and the slow trend growth of productivity have reduced potential output growth, and will do so going forward. Political uncertainty within the EU further limits growth via delayed investment decisions. The DG of the EU Economic and Financial Affairs has suggested in the spring forecast that countries need to use macroeconomic policy to boost investment and demand, to stimulate growth.

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In the UK, after growth of 0.6% in 2015-Q4, the rate of quarterly growth is projected to slow to 0.4% in 2016-Q1. This is consistent with a softening suggested by recent partial indicators of activity such as Purchasing Manager Indices and some business surveys. The pace of quarterly growth is projected to pick up in the middle of the year, reflecting the solid underlying momentum in the economy. As a result, annual growth of 1.8% is projected for 2016 and is forecast to edge up to 1.9%, in 2017. The output gap is forecast to be modestly positive. Growth in private consumption is expected to remain robust and to exceed that of GDP. Renewed momentum in real household disposable income this year and next and resilient consumer sentiment, should support consumption. The household saving ratio fell to 4.2% in 2015 and is forecast to remain stable at around 4% in 2016 and 2017. However, a desire by households to rebuild savings, or a lower-than expected increase in employee compensation, could curb consumption growth below projections.

Inflation in the UK is projected to rise to 0.8% in 2016 and 1.6% in 2017. Nevertheless, it is still expected to remain below the Bank of England’s target of 2%. The waning of the impact of previous falls in energy prices on the price level should bolster inflation this year and next. However, in other sectors, price pressures remain low. For example, the compression of retailers’ margins in the supermarket sector should continue to dampen price increases. Further falls in world energy prices pose a downside risk to inflation, although the impact depends on the extent to which they are passed through to reductions in retail fuel and energy prices.

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Sarah Baker, Senior Analyst

sarah.baker@ahdb.org.uk, 024 7647 8845