The European Commission has presented its economic forecast for the Eurozone within the framework of the European Semester. Thanks to increased domestic demand, Austria is developing well, whilst Italy might slide into deficit procedures.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, was in a rather more muted than jubilant mood when he presented the forecast for the economic development in the European Union on 8 October 2018. Economic growth will slow down in the coming years; however, according to Moscovici the European economy will remain stable. Unemployment was declining, having initially fallen to 8.1 % and then to 6.8 % in 2018. This was the lowest level since the outbreak of the global economic crisis in 2008. Youth employment too had fallen to 14.8 % throughout the entire EU. Another positive aspect was that the EU average of involuntary part-time workers and the number of people not actively seeking work had also been reduced. Due to rising global uncertainties and international trade tensions, the Commission highlighted in particular domestic demand as the driving force of growth over the next years. This year, the European Union’s GDP shall increase by 2.1 %; however, growth is expected to be significantly lower in the coming years. The Commission estimates 1.9 % for 2019 and 1.7 % for 2020. The responsible factors identified are a slowdown of global economic growth, increasing global uncertainty and rising oil prices. This will also impact on the European labour market, whose growth is expected to slow down. One also expects the employment rate to continue its positive development in the next two years, albight it being very low. At 0.5 %, it falls for the EU27 in 2018 and shall be at 0.4 % in 2020.
The report also states that the import deficit of the European Union remains high, thereby continuing to promote global inequalities. This can among other be attributed to the fact that even though wages might rise in the EU27, they are not rising adequately enough. In general, it will not be possible to create nominal convergence in the Eurozone if Member States continue their current restraint in respect of wage increases.
Demand as driving force for the Austrian economy
Compared to last year’s 2.6 %, in 2018, Austria’s GDP is expected to rise by 2.7 %. Thanks to an increase in private consumption, positive labour market data and rising wages, in Austria too domestic demand remains the driving force of growth. However, following a strong first half of 2018, the European Commission forecasts - due to global turbulences - a slowdown of the domestic economy in the second half. This will also have an impact on the Gross Domestic Product of the coming years. According to the European Commission, 2019 will only see a moderate growth of 2 %, whilst in 2020 Austria’s economy will only grow by 1.8 %. The Commission forecasts an increase of private consumption due to rising available income. Over the next two years, unemployment is expected to initially fall to 4.8 % and then to 4.4 % (calculation according to EUROSTAT) in 2020.
Italy - a bone of contention
According to the forecast of the European Commission, public gross debt in the EU27 will experience a general downward trend until 2020, even if there is minimum growth of 0.1-0.2 %. However, next year, Italy’s budget deficit will increase to 2.9 % and to 3.1 % on 2020. The materialisation of these forecasts would mean that a basis for deficit procedures exists. The Stability and Growth Pact stipulates a deficit ration of 3 %. Previously, Italy had stated 2.4 % of GDP as the guide value for her new government borrowing. Due to the less positive economic development in the country - GDP shall not, as forecast, grow by 1.5 % - but only by 1.2 % - the Commission also revised the forecast for the new government debt. In case of government debt of over 60 %, the EU stipulates a mandatory debt reduction, which Rom, in spite of the second highest debt ratio in the Eurozone - after Greece - rejects. Hence, EU might initiate criminal proceedings against Italy on 21 November 2018; however, this would need the agreement of the ECOFIN Council.