Friday 21 July 2017

EU raises growth forecast

Europe’s economy may grow almost twice as fast as previously forecast this year with a more "moderate" expansion in the second half, the European Commission said.

Gross domestic product in the 16-nation euro region may increase 1.7pc this year instead of a previously projected 0.9pc, the Brussels-based commission said in a report published today.

The region’s growth rate may slow by half to 0.5pc in the current quarter and weaken to 0.3pc in the fourth quarter, it said.

Europe’s economy expanded at the fastest pace in four years in the second quarter led by a surge in exports and reviving consumer demand.

The commission said growth will weaken as governments trim budget deficits, echoing remarks by International Monetary Fund Managing Director Dominique Strauss-Kahn, who said in an interview yesterday that Europe faces the biggest risk of a “sluggish recovery.”

“We have now solid ground under our feet” but “there’s no reason to shout for victory,” European Union Commissioner for Economic and Monetary Affairs Olli Rehn said at a press conference in Brussels.

“Instead we must stay alert and vigilant in the face of the remaining uncertainties.”

‘Slowdown’

The euro remained higher against the dollar after the report and was up 1pc at $1.2807 as of 11:18am in London.

It gained after the Basel Committee on Banking Supervision yesterday gave lenders as long as eight years to comply with higher capital requirements intended to prevent future financial crises.

European stocks rose, with the Stoxx 600 index gaining 0.9pc.

In the 27-member EU, GDP may increase 1.8pc instead of a previously projected 1pc, the commission said.

GDP in Germany, Europe’s biggest economy, will jump 3.4pc, almost three times the pace projected in May, while the French and Italian economies are also seen growing at faster rates. The Spanish economy may shrink 0.3pc instead of 0.4pc.

“It was clear that we’d see a bit of a slowdown in the third and fourth quarters,” said Costa Brunner, an economist at Natixis in Frankfurt.

“We’ve also revised our full-year growth forecast after the second-quarter results but the commission’s full-year forecast is certainly rather optimistic.”

‘Fragile’ recovery

Euro area economic growth is already showing some signs of weakening as a cooling global economy threatens to undermine exports and governments step up budget cuts.

Growth in Europe’s services and manufacturing industries weakened in August and unemployment remained near a 12-year high in July.

The commission said that the recovery remains “fragile” with “uneven” developments among member states.

Financial markets have only “partly recovered” from tensions in May when EU leaders were forced to announce a rescue package to prevent the fiscal crisis in Greece from spreading across the region.

While budget cuts may help “dissipate market concerns,” Rehn said that “uncertainty about the nature and timing of such measures may weigh” on confidence in some countries.

In Greece, which posted the second-largest deficit after Ireland in 2009, it is “essential” that the government maintains its “rigorous fiscal consolidation,” he said.

‘Internal challenges’

“Of course, I’m worried about the future of the European economy and the situation in countries” like Greece, Rehn said.

“We still have substantial uncertainties both due to external developments and internal challenges relating to sovereign debt and financial markets. We have been able to calm down financial markets to some extent.”

Strauss-Kahn told Bloomberg Television in Oslo yesterday that the global recovery isn’t “coming as fast and as strong as we expected.”

The Organisation for Economic Cooperation and Development said on Sept. 9 that recent data indicate the slowdown will be “more pronounced than previously expected.”

“The global recovery is set to go through a soft patch in the second half of the year, though a double-dip seems unlikely,” the commission said.

“The outlook is for an uneven recovery, with robust growth in emerging economies but a still fragile situation in several advanced economies.”

With companies reluctant to boost hiring and wages, euro- region inflation may average 1.4pc this year instead of a previously projected 1.5pc, the commission said. In 2009, inflation was 0.3pc as the economy contracted 4.1pc.

Today’s release is a preliminary forecast based on projections for Germany, France, Italy, the Netherlands, Spain, Poland and the UK, which account for about 80pc of the EU’s GDP.

Bloomberg

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