Growth this year is forecast to rise to 1.7% for the European Union as a whole and to 1.3% for the euro area. In 2016, economic activity should grow by 2.1% and 1.9%, respectively, according to the European Commission’s Winter Economic Forecast for 2015, saying this is due to strengthened domestic and foreign demand, very accommodative monetary policy and a broadly neutral fiscal stance.
Growth prospects across Europe are still limited by a weak investment environment and high unemployment, the EC forecast said. However, since the autumn, a number of key developments have brightened the near-term outlook.
Oil prices have declined faster than before, the euro has depreciated noticeably, the ECB has announced quantitative easing, and the European Commission has presented its Investment Plan for Europe. All these factors are set to have a positive impact on growth.
However, uncertainty surrounding the existing outlook has increased, downside risks have intensified, while new positive factors have emerged due to geopolitical tensions, renewed market volatility, and incomplete implementation of structural reforms.
“Europe stands at a critical juncture. The right economic conditions are in place for sustained growth and job creation. Following the difficult policy choices governments have made due to the crisis, the effects of reforms are emerging,” said Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue.
“We have to step up the reform momentum to strengthen the recovery and make sure it translates into money in people's pockets. The Commission is delivering on its commitments on three main fronts: investment, structural reforms and fiscal responsibility. Implementation now lies with the member states. And that is where our results will be judged."
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said that the outlook “is a little brighter today than when we presented our last forecasts. The fall in oil prices and the cheaper euro are providing a welcome shot in the arm for the EU economy.”
He added that the Investment Plan for Europe and the ECB’s important recent decisions will help create a more supportive backdrop for reforms and smart fiscal policies.
“But there is still much hard work ahead to deliver the jobs that remain elusive for millions of Europeans,” Moscovici said.
While all member states are expected to have positive growth rates this year and the recovery has continued to broaden in recent quarters, the divergence in economic performance across the EU is likely to continue, the EC forecast said, explaining that this is in part because the progress with deleveraging among banks, the public and private sectors still differs across member states.
The support to exports from the euro's depreciation will depend on national trade orientation and patterns of specialisation. All in all, in 2015, the range of member states' growth rates is expected to remain broad, from 0.2% (Croatia) to 3.5% (Ireland).
The trend towards low inflation has continued and briefly turned negative in December on the back of the steep fall in energy prices. Inflation is set to remain subdued in 2015 as low commodity prices dampen the headline figure. Inflation should increase as of mid-2015 and in the course of 2016, as economic activity gradually strengthens, wages rise and the economic slack is reduced.
In the EU, inflation is projected at 0.2% in 2015 and 1.4% in 2016. Inflation in the euro area is forecast to be -0.1% this year before rising to 1.3% in 2016.
As economic growth gains momentum, so will net job creation, which has accelerated over the course of last year from a low level, the EC forecast said. But economic growth is expected to be insufficient for a marked improvement.
The unemployment rate is set to fall to 9.8% in the EU and 11.2% in the euro area in 2015. The labour market reforms undertaken in recent years are expected to continue bearing fruit and help unemployment rates decrease further in 2016.
The reduction in general government deficits continues, but the fiscal stance is now neutral. The deficit–to-GDP ratios are forecast to keep falling over the next two years. In the EU, they are expected to fall to 2.6% this year from 3.0% in 2014 and to 2.2% in 2016. In the euro area, they should drop to 2.2% in 2015 and 1.9% in 2016. For the EU as a whole, the debt-to-GDP ratio is expected to have peaked at 88.4% in 2014. For the euro area, it should peak this year at 94.4%, before declining.
