The euro area and European Union economies have demonstrated robust growth, exceeding expectations and marking a definitive shift from recovery to expansion. In 2017, both regions achieved a growth rate of 2.4%, marking the most rapid expansion in a decade. This positive momentum is anticipated to persist through 2018 and 2019, with projected growth rates of 2.3% and 2.0% respectively for both the euro area and the EU.
Sustained Economic Growth Anticipated in Eurozone
The estimated 2.4% GDP growth for 2017 surpasses the projections from the November Autumn Economic Forecast, which anticipated 2.2% for the euro area and 2.3% for the EU. Furthermore, the growth forecasts for 2018 and 2019 have been upwardly revised since November. The Euro Forecast now indicates an increase from 2.1% to 2.3% for the current year and from 1.9% to 2.0% for 2019 in both the euro area and EU economies. This upward revision is attributed to a confluence of factors: strengthened cyclical momentum within Europe, characterized by ongoing improvements in labor markets and heightened economic sentiment, alongside a more pronounced upswing in global economic activity and international trade.
Robust demand, high levels of capacity utilization, and favorable financing conditions are expected to bolster investment throughout the forecast period, further solidifying the positive euro forecast.
Inflation in Euro Area Remains Moderate
Core inflation, excluding volatile energy and unprocessed food prices, is projected to remain subdued. This is due to the gradual reduction of slack in labor markets and continued moderation in wage pressures. Headline inflation, which is significantly influenced by energy prices, is expected to experience a modest increase. In 2017, inflation within the euro area reached 1.5%. The euro forecast suggests it will remain stable at 1.5% in 2018 and then slightly increase to 1.6% in 2019.
Balanced Risk Assessment for Euro Forecast with Short-Term Upside Potential
The risks associated with this euro forecast for economic growth are considered to be broadly balanced. In the short term, economic expansion could potentially exceed current expectations, fueled by high levels of economic sentiment. However, in the medium term, elevated global asset prices could become susceptible to reassessments of risks and underlying economic fundamentals. Downside risks persist, particularly concerning the uncertain outcomes of Brexit negotiations, geopolitical tensions, and the increasing trend towards inward-looking and protectionist policy approaches globally.
UK Economic Outlook: Technical Assumption for 2019 Euro Forecast
Given the ongoing discussions surrounding the terms of the UK’s departure from the EU, the euro forecast projections for 2019 are based on a purely technical assumption. This assumes a continuation of the status quo in trading relationships between the EU27 and the UK. It is important to note that this assumption is solely for forecasting purposes and does not reflect any stance on the ongoing Article 50 negotiations.
Background on the Euro Forecast
This euro forecast is underpinned by a set of technical assumptions regarding exchange rates, interest rates, and commodity prices, with a data cut-off date of January 26, 2018. For all other data inputs, this forecast incorporates information available up to January 30th.
Starting this year, the European Commission has transitioned back to publishing two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) annually. This replaces the previous system of three comprehensive forecasts per year (winter, spring, and autumn) that had been in place since 2012. The interim forecasts will cover annual and quarterly GDP and inflation figures for the current year and subsequent years for all EU Member States, the euro area, and EU aggregates. This adjustment aligns the European Commission’s forecast schedule with those of other prominent institutions, such as the European Central Bank, the International Monetary Fund, and the Organisation for Economic Co-operation and Development.
