The Winter 2020 Economic Forecast published projects that the European economy is set to continue on a path of steady, moderate growth. The euro area has now enjoyed its longest period of sustained growth since the euro was introduced in 1999.
The forecast projects that euro area gross domestic product (GDP) growth will remain stable at 1.2% in 2020 and 2021. For the EU as a whole, growth is forecast to ease marginally to 1.4% in 2020 and 2021, down from 1.5% in 2019.
Growth to remain stable, driven by domestic demand
The external environment remains challenging. However, continued employment creation, robust wage growth and a supportive policy mix should help the European economy maintain a path of moderate growth. Private consumption and investment, particularly in the construction sector, will continue to fuel economic growth. Public investment, especially in transport and digital infrastructure, is expected to increase significantly in a number of Member States. Together with tentative signs of stabilisation in the manufacturing sector, and a possible bottoming out of the decline in global trade flows, this should allow the European economy to continue expanding. At the same time, these factors appear insufficient to shift growth into a higher gear.
A small upward revision to the inflation forecast
The forecast for inflation (Harmonised Index of Consumer Prices) in the euro area has been raised to 1.3% in 2020 and 1.4% in 2021, an increase of 0.1 percentage points for both years compared to the Autumn 2019 Economic Forecast. This reflects tentative signs that higher wages may start passing through to core prices and slightly higher assumptions about oil prices.
In the EU, the forecast for inflation in 2020 has also been raised by 0.1 percentage points to 1.5%. The forecast for 2021 remains unchanged at 1.6%.
Risks to the forecast
While some downside risks have faded, new ones have emerged. Overall the balance of risks continues to remain tilted to the downside.
The ‘Phase One’ trade deal between the US and China has helped to reduce downside risks to some extent, but the high degree of uncertainty surrounding US trade policy remains a barrier to a more widespread recovery in business sentiment. Social unrest in Latin America risks derailing the region’s economic recovery. Heightened geopolitical tensions in the Middle East have raised the risk of conflict in the region.
While there is now clarity on trading relations between the EU and the United Kingdom during the transition period, there remains considerable uncertainty over the future partnership with the UK. The outbreak of the ‘2019-nCoV’ coronavirus, with its implications for public health, economic activity and trade, especially in China, is a new downside risk. The baseline assumption is that the outbreak peaks in the first quarter, with relatively limited global spillovers. The longer it lasts, however, the higher the likelihood of knock-on effects on economic sentiment and global financing conditions. Risks related to climate change, though mainly long-term, cannot be ruled out in the short term.
On the positive side, the European economy could benefit from more expansionary and growth-friendly fiscal policies and enjoy positive spillovers from more benign financing conditions in some euro area Member States.
For the UK, a purely technical assumption
Given that the future relations between the EU and the UK are not yet clear, projections for 2021 are based on a purely technical assumption of status quo in terms of their trading relations. This is for forecasting purposes only and reflects no anticipation or prediction with regard to the outcome of the negotiations between the EU and the UK on their future relationship.