Europe’s economy is sputtering, weighed down by the bruising U.S.-China trade fight and a potentially chaotic Brexit, the European Union said Tuesday, further slashing growth expectations and warning of prominent risks.
Gross domestic product in the 19-member eurozone will grow by 1.2% in 2019, the EU said in its quarterly report, cutting its 1.3% forecast from February. The expansion rate is seen barely rising to 1.5% next year, down from 1.6% previously expected.
The EU’s economic outlook is darkening as global trade fights hit manufacturing and exports, particularly in the bloc’s growth engine, Germany. President Trump’s threat this week–to slap China with more tariffs Friday, barring a trade deal–highlights Europe’s vulnerability to developments beyond its control.
“Substantial downside risks to the growth outlook remain,” the European Commission, the EU’s executive, said. “An escalation of trade tensions could prove to be a major shock and create roadblocks for Europe’s growth trajectory.”
International developments coupled with domestic uncertainties and challenges are crippling the European recovery that only two years ago was hailed as the “euroboom.”
A disruptive U.K. withdrawal from the EU without a deal would further dampen economic growth pressured by global developments, the commission said.
Meanwhile, Italy’s debt problems are mounting amid a recession, widening the eurozone deficit. Rome’s budget deficit is expected to hit 2.5% of GDP this year and 3.5% in 2020, the commission said, expanding from 2.1% in 2018 and breaching a 3% cap under EU rules. That sets the stage for a fight between Rome and other eurozone countries demanding that Italy’s populist government rein in spending.
Finally, European Parliament elections later this month threaten to fuel internal problems, as anti-EU parties make gains in the polls. Populist and nationalist European leaders are expected to form the third biggest bloc in the EU assembly. They have vowed to wrestle back power from Brussels to national capitals, raising the prospect of more political turmoil and economic uncertainty.
Despite the global and local challenges, Europe’s economy is set for its seventh consecutive year of growth. Domestic demand and rising wages will underpin GDP expansion, and drive down unemployment, the EU said.
“We should stand ready to provide more support to the economy if needed,” said Pierre Moscovici, the EU commissioner for economic and financial affairs, taxation and customs. “Above all, we must avoid a lapse into protectionism, which would only exacerbate the existing social and economic tensions.”
U.S. tariff threats are stoking business uncertainty and will prolong a longer-than-expected economic slowdown, European Central Bank President Mario Draghi said in April. The eurozone lender could act to shore up the faltering economy, he added.
Persistently subdued inflation would also strengthen the ECB’s hand for an economic boost. The EU held steady its forecast for annual consumer-price increases at 1.4% for 2019 and said that the inflation rate would be unchanged next year. The ECB targets annual inflation of just under 2%.
Yet ECB action alone may not be sufficient to arrest the eurozone’s slowdown. The EU said fiscal loosening in Europe may prove a stronger support to economic growth than expected, while reiterating its call for structural reforms. Eurozone governments remain split on deploying more public spending to juice their economies.
“The eurozone continues to need more stimulus than it has seen in recent years,” Erik Nielsen, chief economist at UniCredit Bank in London, said before the EU unveiled its latest forecasts. “Fiscal policy needs to be used to take the pressure off an already over-extended monetary policy.”
Source: Dow Jones