Brussels Daily
04 Nov 2014


Brussels Daily

2014 Autumn Economic forecast: Slow recovery with very low inflation

Brussels, 04 November 2014

The European Commission’s autumn forecast projects weak economic growth for the rest of this year in both the EU and the euro area. Real GDP growth is expected to reach 1.3% in the EU and 0.8% in the euro area for 2014 as a whole. Growth is expected to rise slowly in the course of 2015, to 1.5% and 1.1% respectively, on the back of improving foreign and domestic demand. An acceleration of economic activity to 2.0% and 1.7% respectively in 2016 is expected to be driven by the strengthening of the financial sector (following the comprehensive assessment by the European Central Bank and further progress towards the Banking Union), as well as recent structural reforms starting to bear fruit.

Jyrki Katainen, European Commission Vice-President for Jobs, Growth, Investment and Competitiveness, said: “The economic and employment situation is not improving fast enough. The European Commission is committed to use all available tools and resources to deliver more jobs and growth in Europe. We will put forward a €300 billion investment plan to kick-start and sustain economic recovery. Accelerating investment is the linchpin of economic recovery.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “There is no single, simple answer to the challenges facing the European economy. We need to act across three fronts: for credible fiscal policies, ambitious structural reforms and much-needed investment, both public and private. We must all assume our responsibilities, in Brussels, in national capitals and in our regions, to generate higher growth and deliver a real boost to employment for our citizens.”

The economic recovery that started in the second quarter of 2013 remains fragile and the economic momentum in many Member States is still weak. Confidence is lower than in spring, reflecting increasing geopolitical risks and less favourable world economic prospects. Despite favourable financial conditions, the economic recovery in 2015 will be slow. This, reflects the gradual fading of the crisis legacy with still high unemployment, high debt and low capacity utilisation. The European Central Bank’s recent comprehensive assessment has reduced uncertainties about the soundness of the banking sector and improving financing conditions should help with the pick-up in economic activity. In 2016, strengthened domestic and foreign demand and a continuation of very accommodative monetary policy associated with low financing costs should further strengthen growth.

In 2014, the range of Member States’ growth rates is expected to remain broad, from -0.7% (Croatia) to 4.6% (Ireland). However, growth differences are expected to decline over the next two years. In 2015 and 2016, all EU countries are set to register positive growth. This is also when the lagged impact of already implemented reforms should be felt more strongly.

A slow return of modest economic growth

The EU’s recovery appears weak, in comparison to other advanced economies and with respect to historical examples of post-financial crisis recoveries, even though these too were typically slow and fragile. Over the forecast horizon, domestic demand should benefit increasingly from the very accommodative monetary policy, the progress made in reducing private debt burdens and the broadly neutral fiscal stance. Private investment should recover gradually, also benefitting from improving demand prospects and catching-up effects, though initially held back by ample spare capacities. Private consumption is set to expand moderately in 2015 and 2016, supported by low commodity prices and rising disposable incomes, as the labour market gradually improves. Public consumption is expected to contribute marginally to growth. Against the backdrop of a moderate expansion of world trade, net exports are likely to contribute only marginally to GDP growth over the coming years.

Labour market conditions improving only slowly

Job creation has been moderate and unemployment rates have fallen slightly from high levels. Since economic growth is expected to gain momentum gradually, more meaningful labour market improvements should occur towards the end of the forecast horizon. The unemployment rate is set to fall to 9.5% in the EU and 10.8 % in the euro area in 2016.

The trend towards lower inflation has continued over 2014 in EU Member States, driven by lower commodity prices and substantial economic slack. Inflation is set to remain very low in 2014. As economic activity gradually strengthens and wages rise, inflation should increase, also helped by the recent depreciation of the euro. In the EU, inflation is projected at 0.6% in 2014, 1.0% in 2015 and 1.6% in 2016. HICP (Harmonised Index of Consumer Prices) inflation in the euro area is forecast at 0.5% this year and 0.8% in 2015 before rising to 1.5% in 2016.

The reduction in general government deficits is set to continue. The deficit–to-GDP ratios in both the EU and the euro area are set to decrease further this year, albeit more slowly than in 2013, to respectively 3.0 % and 2.6 %. Government deficits are forecast to continue falling over the next two years, helped by strengthening economic activity. The fiscal policy stance is expected to be close to neutral in 2014 and 2015. The debt-to-GDP ratios of the EU and the euro area are expected to peak next year at 88.3 % and 94.8 % respectively (under the European System of Accounts 2010 definition).

Risks to the outlook remain tilted to the downside

Downside risks to the growth outlook still dominate on the back of geopolitical tensions, fragility in financial markets and the risk of incomplete implementation of structural reforms. The risks to the inflation outlook remain balanced.

Autumn forecast 2014: Slow recovery with very low inflation – European Commission

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