The election of Donald Trump in the US and the UKâ€™s decision to leave the European Union are heightening economic risk in the euro area, the European Commission said, as it predicted growth would slow this year.
In its first set of economic forecasts compiled since Trumpâ€™s victory and with the British government gearing up to officially trigger Brexit, the Brussels-based commission said on Monday that the euro areaâ€™s economic recovery is â€œassailed by risks.â€ The 19-nation region will grow by 1.6 percent of gross domestic product this year, slower than the 1.7 percent expansion last year.
â€œLarge uncertainties characterize the economic outlook globally and in the euro area,â€ Marco Buti, the head of the Commissionâ€™s economic and financial affairs department, said in a statement. â€œThe path for the UKâ€™s exit from the union and its future status are still unclearâ€ while â€œthe concrete shape of the economic policies of the new US administration has still to emerge.â€
The EU is bracing for troubled times ahead with a new US president that has taken a more protectionist trade stance and with the next two years set to be dominated by negotiations with the UK on its withdrawal from the bloc. European governments are also struggling to shake off the effects of its debt crisis nearly seven years since Greeceâ€™s first bailout, work out its response to an aggressive Vladimir Putin to its east and south, and come up with solutions to the flow of migrants from the war-ravaged Middle East.
â€œWith uncertainty at such high levels, itâ€™s more important than ever that we use all policy tools to support growth,â€ European Economics Commissioner Pierre Moscovici, said in a statement. â€œThe European economy has proven resilient to the numerous shocks it has experienced over the past year.â€
The growth outlook for Germany, France, Italy and Spain â€” the euro zoneâ€™s four largest economies, â€” is mixed. The commission upgraded its forecast only for Germany. Yet, with an increase in GDP of 1.6 percent, thatâ€™s still less than the 1.9 percent growth rate it witnessed in 2016, the commission said.
Franceâ€™s economy will grow by 1.4 percent, an increase of 0.2 percentage points on 2016. Italyâ€™s 2017 rate of 0.9 percent is identical to that of last year. Spain will grow by 2.3 percent â€” less than the 3.2 percent by which it expanded in 2016, according to Mondayâ€™s forecast.
â€œThe balance of risks remains on the downside although both upside and downside risks have increased,â€ the commission said. While in the short term, fiscal stimulus in the US could have a stronger impact on growth than currently expected, the commission said, â€œin the medium term, risks to the growth outlook stem from legacies of the recent crises; the UKâ€™s vote to leave the European Union; potential disruptions to trade; faster monetary tightening in the US, which could have a negative influence on emerging market economies; and the potential consequences of high and rising debt in China.â€
The euro-area inflation rate will average 1.7 percent in 2017, 0.3 points higher than in its last forecast in November, but still below the European Central Bankâ€™s goal of just below 2 percent, the commission said. Stripping out volatile energy and food prices, inflation will â€œrise only gradually,â€ the commission said, echoing remarks made last week by ECB President Mario Draghi.
The ECBâ€™s current stimulus settings reflect a recovering economy that isnâ€™t yet strong enough to stand on its own, Draghi said. Even as the inflation rate quickens, the ECB also stated that current gains are largely driven by energy prices and therefore donâ€™t warrant a discussion about tightening monetary policy yet. The ECB will trim its bond-buying program to 60 billion euros ($64 billion) per month in April from 80 billion euros a month currently, and it intends at this stage to let it run at that pace until the end of the year.
â€œThe impact of positive base effects in energy inflation is â€œset to fade,â€ the commission said. â€œThe slight increase in wages expected this year and next, as well as the narrowing and closure of the output gap, should begin supporting a moderate and gradual pick up in underlying price pressures.â€