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Economy: stagnant growth in Europe, Italy worst performer. Robust growth in Ireland and East European Countries

Economists in Brussels urge States and production systems to be cautious of mounting international "uncertainties": trade tensions, China's slowdown, a “disorderly” Brexit. Robust GDP growth above 4% forecast in some countries, while others lag behind: Italy ranks last while Germany is second to last

The key word is “uncertainty”,  repeated several times in the Autumn Economic Forecasts, released on Thursday 7 November by the EU Commission. The term recurs, like a mantra, in the comments by the Commissioners Moscovici and Dombrovskis. “The European economy is now in its seventh consecutive year of growth and is forecast to continue expanding in 2020 and 2021”: the opening lines seem encouraging. “Labour markets remain strong and unemployment continues to fall”, in many EU Countries, but not all. “However – here comes the bad news – the external environment has become much less supportive and uncertainty is running high. This is particularly affecting the manufacturing sector, which is also experiencing structural shifts.” Commissioner Pierre Moscovici (in the photos) pointed out: “there are a number of risks that could lead to lower growth” in the coming years.

Robust fundamentals, new risks. European economy “looks to be heading towards a protracted period of more subdued growth and muted inflation”, confirm the experts of the Commission. Euro area gross domestic product (GDP) is forecast to grow by 1.1% in 2019 and by 1.2% in 2020 and 2021. Compared to the Summer 2019 Economic Forecast (published in July), the growth forecast has been downgraded by 0.1 percentage point in 2019 (from 1.2%) and 0.2 percentage points in 2020 (from 1.4%).

For the EU as a whole, GDP is forecast to rise by 1.4% in 2019, 2020 and 2021.

“The fundamentals of the EU economy are robust: after six years of growth, unemployment in the EU is at its lowest since the turn of the century and the aggregate deficit below 1% of GDP. But the challenging road ahead leaves no room for complacency. All policy levers will need to be used to strengthen Europe’s resilience and support growth,” commented Pierre Moscovici, once again compelled to signal the different speeds of the Member States’ economies.

Tariffs, China’s slowdown, Brexit… According to the Commission “persisting trade tensions between the US and China and high levels of policy uncertainty, especially with respect to trade, (ie.tariffs – Ed.’s note) have dampened investment, manufacturing and international trade. With global GDP growth set to remain weak, growth in Europe will depend on the strength of more domestically-oriented sectors.” Brussels’ economic experts reiterate that “a number of risks could lead to lower growth than forecast. A further increase in uncertainty or a rise in trade and geopolitical tensions could dampen growth, as would a sharper-than-expected slowdown in China due to weaker effects from policy measures enacted so far.” Closer to home, “risks include a disorderly Brexit and the possibility that weakness in the manufacturing sector could have a bigger spillover effect on domestically-oriented sectors.”

Italy: debt and unemployment. The Commission’s economic outlook for Italy is particularly gloomy, bringing up the rear with a projected GDP growth of only 0.1% in 2019, set to rise by 0.4%, in 2020 and by 0.7% in 2021. Government deficit is expected to remain stable at 2.2% of GDP in 2020, projected to rise to 2.3 in 2021.

The unemployment rate is set to remain at 10% over the three-year period, while public debt is forecast to increase steadily from 136,2% in 2019 to 136.8 in 2020 reaching 137.4 in 2021.

The Commission’s evaluation is clear: “Italy’s economy has largely been stagnating since early 2018 and still shows no signs of a meaningful recovery.” For the Commission, measures such as the new minimum income scheme and provisions for early retirement contribute to the rise in Government spending. Record-breaking growth rates are forecast for Ireland: 5.6% in 2019, followed by Malta (5.0%). Good performance forecast for almost all Eastern European countries: Hungary 4.6%, Poland and Romania 4.1, Bulgaria 3.6, Lithuania 3.8%. Germany ranks second to last in Europe, with a GDP projected at 0.4% in 2019, set to rise at 1.0% in the two next years.

Dombrovskis’ cautious recipe. “So far, the European economy has shown resilience amid a less supportive external environment: economic growth has continued, job creation has been robust, and domestic demand strong. However, we could be facing troubled waters ahead:

a period of high uncertainty

related to trade conflicts, rising geopolitical tensions, persistent weakness in the manufacturing sector and Brexit.”

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, seems concerned. He said: “I urge all EU countries with high levels of public debt to pursue prudent fiscal policies and put their debt levels on a downward path” – the message appears to be clearly addressed to Rome. “On the other hand, those Member States that have fiscal space should use it now.”

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