Growth hindered by external factors

Domestic demand continues to drive economy upwards

Pierre Moscovici

The European economy is set for its seventh consecutive year of growth in 2019, with all Member States' economies due to expand, the Commission stated in its Summer Economic Forecast released last Wednesday. The short-term outlook for the European economy, however, is clouded by external factors including global trade tensions and significant policy uncertainty. These have continued to weigh on confidence in the manufacturing sector, which is the most exposed to international trade, and are projected to weaken the growth outlook for the remainder of the year.

“The European economy continues to expand against a difficult global backdrop. All EU countries are set to grow again in both 2019 and 2020, with the strong labour market supporting demand. Given the numerous risks to the outlook, we must intensify efforts to further strengthen the resilience of our economies and of the euro area as a whole,” Economic Affairs Commissioner Pierre Moscovici said.

The forecast for Eurozone GDP growth in 2019 remains unchanged at 1.2%, while the forecast for 2020 has been lowered slightly to 1.4% following the more moderate pace expected in the rest of this year (spring forecast: 1.5%). The GDP forecast for the EU remains unchanged at 1.4% in 2019 and 1.6% in 2020.

“All EU economies are still set to grow this year and next, even if the robust growth in Central and Eastern Europe contrasts with the slowdown in Germany and Italy. The resilience of our economies is being tested by persisting manufacturing weakness stemming from trade tensions and policy uncertainty. On the domestic side, a “no deal” Brexit remains a major source of risk,” VP Valdis Dombrovskis pointed out.

While growth earlier this year benefited from a number of temporary factors, the outlook for the rest of the year looks weaker as prospects for a quick rebound in global manufacturing and trade have dimmed. GDP growth in 2020 is forecast to be higher, partly due to a higher number of working days. Domestic demand, particularly household consumption, continues to drive economic growth in Europe helped by the continued strength in the labour market. GDP is forecast to grow in all EU Member States this year and next.

Risks to the global economic outlook remain highly interconnected and are mainly negative. An extended economic confrontation between the US and China, together with the elevated uncertainty around US trade policy could prolong the current downturn in global trade and manufacturing and affect other regions and sectors. This could have negative repercussions for the global economy including through financial market disruptions. Tensions in the Middle East also raise the potential for significant oil price increases.

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