EU public finances expected to pick up despite gloomy growth outlook

10 Nov 16

Public finances across the EU are set to continue improving in the coming years, the European Commission has predicted, despite another cut to growth forecasts.


In its autumn economic forecast, published yesterday, the commission envisages a 0.3 percentage point drop in the euro area’s public deficit in both 2017 and 2018, while the region’s debt-to-GDP ratio is expected to fall from 91.6% to 89.4% in two years time.

The commission said the declining deficit was a result of lower welfare spending in line with falling unemployment, keeping the public sector’s wage bill down, and low interest rates, which have made debt-servicing cheaper.

The EU executive cut its growth forecasts for the euro zone and the UK, however, citing increased political uncertainty, including from the UK’s Brexit vote and weak global trade.

Commission vice president Valdis Dombrovskis, responsible for euro and social dialogue, and Pierre Moscovici, commissioner for economic and financial affairs, both stressed the need to tackle inequality and the subsequent backlash against the establishment and free trade being felt around the world.

“In light of increased global uncertainty, it is now even more important than ever to pursue sound and prudent macroeconomic and budgetary policies,” said Dombrovskis. “At the same time it is vital to address inequalities in our societies, so that no one feels left behind.”

Publishing its economic outlook, the commission emphasised that the “benefits of recovery would be felt by all member states”.

While its 1.7% growth forecast for 2016 was a 0.1 percentage point increase on its last predictions in May, the commission said it now only expects 1.5%. These figures all mark a slowdown from the already modest 2% growth seen in 2015.

The commission expects a slight uptick in euro area GDP expansion in 2018, however, to 1.7%.

The UK is one current member state that saw a substantial cut to its forecast. After noting an initial 0.1 percentage point increase on the 1.8% previously expected for 2016, the commission slashed Britain’s 2017 forecast by nearly half, from 1.9% in May to 1% yesterday.

The commission said this reflects the impact on confidence and uncertainty resulting from the UK’s vote to leave the EU, which the country’s prime minister Theresa May has promised will start to take effect in 2017 when she triggers the Article 50 mechanism for formally exiting the union.

The forecast also expects a “relatively rich” job recovery in the euro area, although it noted there remains substantial slack in the labour market and a pick-up in inflation, as oil and other commodities start to regain their price losses.

It does not foresee, however, any boost to exports in the near future. The commission noted global growth is set to be its lowest since 2009 this year, and that global trade has been “exceptionally fragile”. The euro areas’ current trade surplus is as a result expected to decline.

The outlook also noted rising risks, including the uncertain economic trajectory of China and geopolitical tensions, that could further weaken these already disappointing prospects. 


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