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Eurozone growth forecast lifted again as UK outlook dims

Nov 09 2017 14:15
Nikos Chrysoloras and Viktoria Dendrinou

Brussels - The eurozone economy will grow at the fastest pace in a decade this year, while the UK heads into an extended slowdown, the European Commission said, highlighting the increasing divergence between the continent and the British economy.

Raising its 2017 forecast for the 19-country bloc to 2.2% from 1.7% in May, the EU’s executive arm cited “resilient private consumption,” and it predicted a 2.1% expansion in 2018. It cut its 2017 prediction for the UK and sees growth cooling to just 1.1% in 2019, which would be the worst performance since the recession of 2009.

On inflation, while the eurozone rate is projected to remain below the European Central Bank’s goal for the foreseeable future, the UK’s will exceed the Bank of England’s (BoE) target through 2019. Part of that is the impact of a weaker pound, though signs of price pressure prompted the BOE to raise interest rates this month for the first time in 10 years.

After years tackling the financial crisis, the eurozone economy has racked up 18 straight quarters of growth and survey evidence points to continued solid expansion. The positive economic momentum provides a further support for the currency union after a critical electoral year that saw anti-EU populists defeated in a series of key votes.

“Economic growth and job creation are robust, investment is picking up and government deficit and debt are gradually decreasing,” European Commission Vice President Valdis Dombrovskis said.

Even with political risks subsiding, the EU is still trying to deal with President Donald Trump’s more-protectionist trade stance in the US, while negotiations over Britain’s withdrawal from the bloc have failed to make the desired headway.

Having missed a self-imposed deadline to strike a deal on the terms of the divorce with the UK and move on to trade talks, the bloc’s 27 other members hope they can move to the next phase in December.

“In the European Union, downside risks relate to the outcome of the Brexit negotiations, a stronger appreciation of the euro, and higher long-term interest rates,” the commission said. It also sees risks from “elevated geopolitical tensions” - citing North Korea - and economic adjustment in China or an extension of protectionist policies.

The forecast comes two weeks after the ECB announced plans to slow the pace of bond-buying in 2018, taking a step toward ending a stimulus program that has spent more than €2trn trying to revive eurozone inflation. 

While economic growth has been strengthening across the 19-nation bloc, inflation is still showing few signs of a sustained pickup and remains below the ECB’s target. The central bank’s own projections don’t foresee inflation returning to the goal of just under 2% until at least late 2019, a projection echoed by the commission.

“Risks to growth and inflation projections are broadly balanced,” the commission said. “Remaining slack in the labour market and slow productivity growth are among the factors that continue to constrain wage dynamics and dampen inflation.”

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eurozone  |  uk  |  brexit  |  inflation  |  economy

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