Business & Economy

EU Commission revises for the better forecast for economy

26 February, 2014

The European Commission revised for the better the forecast of November 2013 regarding the recovery rate, while Commission Vice-President for Economic and Monetary Affairs and the Euro Olli Rehn appeared satisfied with the developments, noting however that growth was still fragile.

The European Commission`s winter forecast foresees a continuation of the economic recovery in most member states and in the EU as a whole. After exiting recession in spring 2013 and three consecutive quarters of subdued recovery, the outlook is for a moderate step-up in economic growth. Following real GDP growth of 1.5% in the EU and 1.2% in the Euro area in 2014, activity is seen accelerating in 2015 to 2.0% in the EU and 1.8% in the Euro area. These figures each represent an upward revision of 0.1 percentage points compared with the autumn 2013 forecast.

The forecast remains based on the assumption that the implementation of agreed policy measures at EU and Member State level sustains improvements in confidence as well as financial conditions and advances the necessary economic adjustment in Member States, by increasing their growth potential.

The Commission notes that the forecast for Portugal is based on the projections prepared in the context of the tenth review of the Economic Adjustment Programme in mid-December, and will be updated during the ongoing eleventh programme review, while the forecast for Cyprus was finalised in early February, after the third Programme review and before the fourth quarter flash estimate of GDP became available.

Rehn said "recovery is gaining ground in Europe, following the return to growth in the middle of last year".

"The strengthening of domestic demand this year should help us to achieve more balanced and sustainable growth. Rebalancing of the European economy has been progressing and external competitiveness is improving, particularly in the most vulnerable countries. The worst of the crisis may now be behind us, but this is not an invitation to be complacent, as the recovery is still modest. To make the recovery stronger and create more jobs, we need to stay the course of economic reform", he said.

The Commission notes that activity has started to strengthen also in the vulnerable countries, and this trend is expected to continue, and that high-frequency indicators show strong signs of improvements in most countries. However, in line with the characteristics of previous recoveries following deep financial crises, the current upturn is proving rather muted overall, it notes. This reflects the lasting, though fading, impact of the economic crisis in terms of deleveraging pressures, funding constraints as well as internal and external adjustment needs.

Although financing conditions are benign on average, there are still substantial differences between member states and between firms of different size. Nonetheless, after declining strongly for several quarters, investment has rebounded and is expected to gain momentum over the forecast horizon, also to some extent in construction. Diminishing uncertainty should underpin stronger demand, which is expected to be the key driver of growth as the above-mentioned factors gradually subside, the Commission says.

The labour market is characterised by slowly stabilising employment, with unemployment remaining high, as labour market developments typically lag those in GDP by half a year or more. In keeping with this pattern, the outlook is for a modest rise in employment from this year onwards and a decline in the unemployment rate towards 10.4% in the EU and 11.7% in the Euro area by 2015, with cross-country differences remaining very large.

Subdued consumer-price inflation is expected to prevail in the EU and the Euro area in 2014 at rates of 1.2% and 1.0% respectively, before rising slightly by about 0.25% in 2015 when economic growth gains momentum.

Current-account balances in vulnerable member states have improved in recent years following continued price competitiveness gains and a strengthening of their export sectors. A number of these economies are expected to register current-account surpluses in 2014 and 2015.

Referring to the inflation, Rehn said it was reasonable to be low in vulnerable countries implementing programmes, however this should not last long and low inflation should not continue in the Euro area, because that would cause problems. He also indicated that the European Central Bank was closely monitoring the situation and would not hesitate to intervene if necessary.

The reduction in general government deficits is set to continue. In 2014, headline fiscal deficits are projected to fall to 2.7% of GDP in the EU and 2.6% in the Euro area, while debt-to-GDP ratios reach almost 90% in the EU and 96% in the Euro area. The pace of consolidation in terms of structural budget balances indicates a broadly neutral fiscal stance.

According to the Commission, risks are more balanced than they were in autumn. The largest downside risk to the growth outlook is a renewed loss of confidence that could stem from a stalling of reforms at national or European level. This would increase the likelihood of an extended period of weak growth in Europe with a negative impact on economic activity over the forecast horizon, it says.

Furthermore, it notes that, while current price developments reflect both external factors and the ongoing adjustment process, sustained very low inflation in the Euro area would entail risks to the rebalancing of the economy. However, it says, given the gradually strengthening recovery and the increase in confidence, there is only a marginal probability of shocks large enough to de-anchor inflation expectations and initiate EU-wide deflation.

The Commission also notes that there is on the other hand an upside risk that the recovery could be stronger than envisaged, which could occur if further bold structural reforms are implemented. This would underpin positive feedback loops between confidence, economic growth - in particular of investment - and the ability of the banking sector to extend loans.