EU Raises Euro-Area Growth Forecast With Risks More Balanced

  • Inflation outlook for 2017, 2018 cut, European Commission says
  • Projections back Draghi stance that not time to exit stimulus

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Growth in the euro area will be slightly stronger this year than previously forecast, the European Commission said, adding that some risks to the outlook have eased following the defeat of populist parties in France and the Netherlands.

The commission sees the 19-nation economy expanding 1.7 percent this year -- up from 1.6 percent forecast in February -- and growing 1.8 percent in 2018. In its first set of economic forecasts since the U.K. triggered its exit from the European Union, the commission said that risks to euro-area growth are more balanced, though they remain tilted to the downside. At the same time, inflation is projected to be slower than earlier forecast this year and next.

The updated economic forecasts come a few days after pro-EU centrist candidate Emmanuel Macron was elected as France’s new president. His victory against anti-euro candidate Marine Le Pen is a shot in the arm for the EU, which has seen a rise in populism across the continent, and follows the earlier defeat of anti-EU candidate Geert Wilder in elections in the Netherlands.

“Political uncertainty obviously has reduced since the Dutch and French elections,” European Commissioner for Economic Affairs Pierre Moscovici told reporters in Brussels on Thursday. “Populism is on the outs in Europe and it’s not winning ground, but it still has a negative impact on investments.”

Even with political risks subsiding, the EU is bracing to deal with President Donald Trump’s more protectionist trade stance in the U.S., while the next two years are set to be dominated by negotiations with Britain on its withdrawal from the bloc.

External risks to the outlook include the “future U.S. economic and trade policy and broader geopolitical tensions,” the commission said. “China’s economic adjustment, the health of the banking sector in Europe and the upcoming negotiations with the U.K. on the country’s exit from the EU are also considered as possible downside risks in the forecast.”

Unemployment is seen at 9.4 percent this year, and 8.9 percent next year, lower than the previous forecasts, according to the commission’s latest assessment. Core inflation remains “stubbornly low,” as price growth will be largely driven by energy costs, “rather than by a durable and self-sustained momentum.”

The commission’s broad assessment echoes that of the European Central Bank, which also say that risks have become “more balanced.” But its forecasts also support ECB President Mario Draghi’s stance that it’s not yet time to begin withdrawing stimulus. The commission cut its inflation projections for this year to 1.6 percent and sees consumer-price growth of just 1.3 percent in 2018, well below the ECB’s goal.

“Inflation is picking up, but core inflation is not moving a lot,” Moscovici told reporters in Brussels. “It’s not up to me, but also up to the ECB, to draw conclusions out of that.”

ECB policy makers are pondering whether and how to communicate a gradual removal of stimulus amid a steadily strengthening economy that has so far showed little signs of generating faster price growth. Speaking at the Dutch Parliament on Wednesday, Draghi said the central bank’s stimulus hasn’t finished the job yet.

“The economic recovery has evolved from being fragile and uneven into a firming, broad-based upswing,” the ECB president said. “Nevertheless, it is too early to declare success.”

— With assistance by Jones Hayden, Kristian Siedenburg, Kevin Costelloe, Jana Randow, and Nikos Chrysoloras

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