Eurozone growth forecast slashed

Italian recession is caused by government, the Commission said

Photo: EPA Moscovici speaks during a press conference on the Winter 2019 Economic Forecast at the European Commission.

The European Commission slashed its growth forecast for the 19 countries that use the euro, saying even the lower estimate was vulnerable to “large uncertainty” from slowing growth in China and weakening global trade. The EU's executive body cut the forecast for this year to 1.3% from 1.9% in their earlier forecast issued in the autumn. The Eurozone probably grew 1.9% last year, slowing from a 10-year high of 2.4% in 2017. For the full 28-member Union, growth forecasts were cut to 1.5% in 2019 from 1.9%.

Germany, Italy and the Netherlands all saw sizeable downgrades for their growth outlook.

Europe “does seem to be more affected than other areas by the slowdown in global trade,” said Pierre Moscovici, the EU's commissioner for economic and financial affairs. “Nonetheless, Europe's economic fundamentals remain solid.” 2019 is expected to be the seventh straight year of economic growth.

A raft of risks is stalking the European and global economies, including China's slowdown, a trade dispute between the US and China that has added new import taxes, and the likelihood that Britain could leave the EU in March in a chaotic fashion without approving a transition agreement. Other risks include sudden shifts in financial markets. The Commission stressed on 7 February that it simply couldn't predict how bad any of the problem areas could turn out to be.

One notable downgrade was Germany, the biggest economy in the Eurozone. The 2019 forecast was cut to 1.1% from 1.8%, “as a result of weakening export growth” and “disappointing” domestic consumption, Moscovici said. Germany's expansion was further slowed by what it is hoped were temporary troubles in the auto industry. Volkswagen and Daimler faced bottlenecks getting cars certified under new emissions tests that took effect 1 September.

The Commission cut its 2020 forecast for the Eurozone to 1.6% from 1.7% in its autumn forecast. For the full 28-member EU, growth forecasts were cut to 1.7% in 2020 from 1.8%.

The European Commission said uncertainty over Italy's government policies and higher borrowing costs pushed the country into a recession in the second half of last year. Italian GDP was likely to grow by only 0.2% in 2019, down from 1.0% in 2018 and against a 1.2% growth forecast the Commission made last November. In 2020, the Italian economy was likely to expand by 0.8%, “helped by a positive carry-over effect and two more working days,” the Commission said. It had forecast 2020 growth of 1.3% in November.

Italy's GDP contracted 0.1% in the third quarter and 0.2% in the last three months of 2018, putting the Eurozone's third biggest economy in a technical recession for the first time in five years.

“While the initial slowdown was largely due to less dynamic world trade, the recent slackening of economic activity is more attributable to sluggish domestic demand, particularly investment, as uncertainty related to the government's policy stance and rising financing costs took its toll,” the Commission said. Italy's borrowing costs surged in the second half of 2018 as investors grew worried that the populist government in Rome would sharply increase spending without additional sources of revenue even though Italy already has the second highest public debt in Europe at 132% of GDP.

“What Italy needs is deep structural reforms and decisive action to bring down high levels of public debt, in other words, responsible policies that support stability, confidence and investment,” Commission Vice President Valdis Dombrovskis said.

Similar articles