The European Commission upgraded its economic growth forecast for the euro area on Thursday, saying the Eurozone economy will grow by 1.7 percent this year (compared to the 1.6 percent growth projection made in February) and by 1.8 percent in 2018. The European Commission said that the 19-nation bloc’s economy is now more balanced, and risks and downside factors are now outweighed by positive macroeconomic developments.
Although certain risks still remain, the easing of political concerns in France and the Netherlands has effectively prevented the disintegration of the single currency bloc for the time being. The improvements in the economies of the US and mainland China, as well as a rebound in oil prices have helped the Eurozone achieve a quicker pace of growth. It is capitalizing on foreign trade, while rising energy costs drive its price index and factory input costs higher, supporting steady gains in inflation.
"It is good news too that the high uncertainty that has characterized the past twelve months may be starting to ease. However, the euroarea recovery in jobs and investment remains uneven," EU Economy Commissioner Pierre Moscovici said.
Among the EU member states, economic outlook has noticeably improved (compared to earlier projections for 2017 and 2018) for Spain, Finland, and Estonia, while projections for Greece, Croatia, and Romania were subject to downgrade. The EU, and the Eurozone, in particular, are still greatly exposed to the economic risks stemming from changes in policies in the US and mainland China, while the most important domestic challenge for the EU is banking sector problems in certain nations of Southern Europe.
The risks include “future US economic and trade policy and broader geopolitical tensions,” the European Commission said. “China’s economic adjustment, the health of the banking sector in Europe and the upcoming negotiations with the UK on the country’s exit from the EU are also considered as possible downside risks in the forecast.”
Meanwhile, EU inflation is forecast to be slightly slower than expected earlier, but still closer to the ECB two-percent target. Gains in inflation are more pronounced in Eastern Europe, e.g. in Hungary, Lithuania, and the Czech Republic, while inflation expectations in France and Germany were lowered.
“Inflation is picking up, but core inflation is not moving a lot,” Moscovici said. “It’s not up to me, but also up to the ECB, to draw conclusions out of that.”
According to a separate report from IHS Markit, Eurozone manufacturing kept improving in April, with the manufacturing Purchasing Managers’ Index (PMI) having risen to 56.7 compared to 56.2 in March. Readings above 50 indicate expansion. France, Germany, and Italy each hit a six-year Manufacturing high last month.
“Eurozone manufacturers reported buoyant business conditions in April, signaling an encouragingly solid start to the second quarter,” Chris Williamson of IHS Markit said. “Production, order books and exports all grew at the fastest rates for six years, fuelling one of the largest increases in factory jobs in the 20-year history of the survey.”
The European Commission, meanwhile, also sees the EU labor market as solidifying gradually, with unemployment projected to decline to 9.4 percent this year and to 8.9 percent in 2018, which is lower than previous forecasts. The resurgence in manufacturing is one contributing factor to the expected declines in the jobless rate.
