EU Slashes Growth Forecasts

  • Globalization discontent seen causing policy uncertainty
  • Growth outlook was downgraded even before U.S. election

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The European Commission slashed its 2017 economic growth forecasts for the euro area as it warned of instability caused by the U.K.’s decision to leave the European Union and the surge of anti-globalization and populism around the world.

The Brussels-based commission said gross domestic product in the currency bloc will rise by 1.5 percent next year, 0.3 percentage point lower than it forecast in May. The 19-nation region’s inflation rate will average 0.3 percent this year and 1.4 percent in 2017 and 2018, well below the European Central Bank’s goal of just below 2 percent. The projections were prepared before the U.S. presidential election result was known.

The EU is seeking solutions to Brexit, threats from an aggressive Vladimir Putin to the bloc’s east and south, and the flow of migrants from the war-ravaged Middle East. It’s also struggling to shake off the effects of its debt crisis more than six years since Greece’s first bailout sent shock waves across the bloc. The uncertainty may now be heightened by Donald Trump’s victory in the U.S. vote.

“There are of course expectations on this side of the Atlantic in terms of the new president,” European Economics Commissioner Pierre Moscovici told reporters in Brussels. “We’ve talked about global challenges, security, the economy, trade, climate change -- challenges that can only be addressed if both the U.S. and Europe work together.”

Big Four

The commission downgraded its 2017 growth forecasts for Germany, France, Italy and Spain -- the euro zone’s four largest economies. It upgraded its growth forecast for the whole of the currency bloc for 2016 from 1.6 percent of GDP to 1.7 percent.

“In the first months since the U.K.’s referendum on EU membership, the euro-area economy seems to have shrugged off the result, but the sharp increase in policy uncertainty associated with it is expected to persist and to weigh on economic activity over the entire forecast horizon,” the commission said. “Well beyond the U.K., political uncertainty has increased in the context of a rising discontent with globalization and its impact on the distribution of incomes.”

The EU acknowledged that it’s in for a rocky 12 months. By this time next year, the leaders of Germany, France, Italy and the Netherlands could all have been bruised or toppled in elections or, in the case of Italian Prime Minister Matteo Renzi, from the fallout of a referendum.

“We have to show that our social systems are there to protect the weakest, to protect and support and enable people in difficult situations,” European Commissioner Marianne Thyssen said in an interview.

ECB Interest

Having already sought urgent information about Italy’s spending plan for 2017, the Brussels-based commission warned countries against overshooting budget targets. The commission is scheduled to give its verdict on each euro-area nation’s draft budgets next week and has the power to fine countries that persistently breach their deficit commitments up to 0.2 percent of GDP.

The commission’s new forecasts are likely to be viewed with interest in Frankfurt, where the ECB is preparing its own projections for the euro area. Those figures will provide the justification for its next policy decision on Dec. 8, when the Governing Council is set to announce whether it will extend its bond-buying program.

The central bank has pledged to spend 80 billion euros ($89 billion) a month on asset purchases through at least March 2017, and President Mario Draghi has signaled that there won’t be a sudden stop. Executive Board member Peter Praet said on Wednesday that “it will remain necessary to preserve a very substantial amount of monetary support.”

Inflation Hunt

Even so, officials have noted a scarcity of debt in some parts of the market, and ECB staff are reviewing whether the rules of QE need to be adjusted to ensure the program can run as long as needed. Any pickup in inflation might make those adjustments easier.

A breakdown of the ECB’s last projections in September shows the institution saw consumer-price growth averaging around 1.2 percent in the first quarter of next year. That would mark the first time the inflation rate has climbed above 1 percent in more than three years -- providing a possible psychological spur to consumption and investment.

ECB Vice President Vitor Constancio said last week that inflation will reach around 1.3 percent by March and a trend toward “more reasonable” growth in consumer prices should spill over into wages.

Praet and Governing Council members Ewald Nowotny and Klaas Knot all reacted to the U.S. election result by saying the ECB will take some time to monitor the market fallout.

The ECB is “closely monitoring the situation as usual, and usually what we do is look through volatility of course for the first days,” Praet told reporters at a conference in Brussels. “We have to be calm -- calmer than markets, certainly.”

— With assistance by Jonathan Stearns, and Piotr Skolimowski

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