MNI POLICY: EU Growth Stuck in Low Gear - European Commission

By Luke Heighton

     FRANKFURT (MNI) - Europe's economy is expected to continue on a path of

steady, moderate growth despite the "challenging" external environment, the

European Commission said Thursday, driven by strong domestic demand.

     Tentative signs of stabilisation in the manufacturing sector, and a

possible bottoming out of the decline in global trade flows, should allow the

European economy to continue expanding, according to the Winter 2020 Economic

Forecast, although these factors "appear insufficient to shift growth into a

higher gear."

     Here are the key points from the report:

     - Euro area gross domestic product (GDP) growth will remain stable at 1.2%

in 2020 and 2021. For the EU as a whole, growth is forecast to ease marginally

to 1.4% in 2020 and 2021, down from the 1.5% projected in the Autumn 2019

Economic Forecast.

     - The forecast for euro area HICP inflation has been raised to 1.3% in 2020

and 1.4% in 2021, an increase of 0.1 percentage points for both years compared

with theAutumn 2019 Economic Forecast, reflecting "tentative signs" that higher

wages may start passing through to core prices and slightly higher assumptions

about oil prices.

     - In the EU as a whole, the forecast for inflation in 2020 was raised by

0.1 percentage points to 1.5%. The forecast for 2021 remains unchanged at 1.6%.

     - While some downside risks have faded, the report noted, new ones have

emerged. Overall the balance of risks continues to remain tilted to the

downside.

     - The 'Phase One' trade deal between the US and China has helped to reduce

downside risks to some extent, but the high degree of uncertainty surrounding US

trade policy remains a barrier to a more widespread recovery in business

sentiment.

     - The outbreak of the '2019-nCoV' coronavirus is a new downside risk. The

Commission's baseline assumption is that the outbreak peaks in the first

quarter, with relatively limited global spillovers. But "the longer it lasts,"

the report noted, "the higher the likelihood of knock-on effects on economic

sentiment and global financing conditions."

     - Other downside risks include social unrest in Latin America, heightened

geopolitical tensions in the Middle East, and uncertainty over the EU's future

relationship with the UK, while short-term risks related to climate change

"cannot be ruled out."

     - On the positive side, the European economy "could benefit from more

expansionary and growth-friendly fiscal policies and enjoy positive spillovers

from more benign financing conditions in some euro area Member States," the

report stated.

     - European Commissioner for the Economy Paolo Gentiloni said there had been

"encouraging developments in terms of reduced trade tensions and the avoidance

of a no-deal Brexit. But we still face significant policy uncertainty, which

casts a shadow over manufacturing. As for the coronavirus, it is too soon to

evaluate the extent of its negative economic impact."

     - "Despite a challenging environment, the European economy remains on a

steady path, with continued job creation and wage growth. But we should be

mindful of potential risks on the horizon," Valdis Dombrovskis, Executive

Vice-President for an Economy that works for People, said. "Member States should

use this weather window to pursue structural reforms to boost growth and

productivity. Countries with high public debt should also shore up their

defences by pursuing prudent fiscal policies."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com