EU economic outlook: cautious growth forecast

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The European economy has grown at the fastest rate in a decade during 2017, according to the spring 2018 economic forecast from the European Commission.

For the first time all member states experienced growth. However, indications are that this pace has slowed in early 2018, although with unemployment still falling and inflation increasing slowly, the European economy still has room to grow. As such, gross domestic product (GDP) growth in the euro area is forecast to moderate from 2.4% in 2017 to 2.3% in 2018, falling to 2% in 2019, and there is potentially risk to the downside.

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After the lift in growth in the economy during 2017, inflation increased to 1.5%, mainly due to increasing energy costs. Inflation in the euro area is forecast to remain stable at 1.7% for 2018, before rising slightly to 1.8% in 2019. Any further increases in inflation, particularly when wage rate growth is exceeded have the potential to negatively impact consumer demand. Private consumption in the euro area slowed in 2017 as inflation picked up and dampened household real disposable income growth, with households reducing their savings rate slightly in response. Looking forward however, private consumption growth is expected to remain supported by solid fundamentals and elevated consumer confidence.

The unemployment rate in the EU as a whole has continued its downward trend. In 2018, it is forecasted to fall again to 7.1% and 6.7% in 2019, the lowest since 2008.

The risks to the EU spring forecasts are higher than previously seen. External risks to global growth have increased significantly and predominantly surround global trade’s vulnerability to US policy. Within Europe, the outcome of the Brexit negotiations remains the main driver of uncertainty.

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Felicity Rusk, Trainee Analyst

Felicity.Rusk@ahdb.org.uk, 024 7647 8818