EU GDP growth forecast 1.6% for 2014

The European Commission’s EU GDP growth forecast has been increased to 1.6% for the 26-nation trading bloc for 2014 from 1.5% in February. Real GDP growth for the 16-member Eurozone is predicted to grow by 1.2%.

The Commission’s EU GDP growth forecast for 2015 is of 2% for the EU26 and 1.7% for the Eurozone.

The European Commission emphasized that its forecast assumes that Member States will implement the agreed policy measures.

Commission Vice-President Siim Kallas said:

“The recovery has now taken hold. Deficits have declined, investment is rebounding and, importantly, the employment situation has started improving. Continued reform efforts by Member States and the EU itself are paying off. This ongoing structural change reminds me of the profound adjustment that the central and eastern European economies undertook in the 1990s and in subsequent years, linked to their joining the EU exactly 10 years ago.”

“Their experience shows how important it is to embrace structural reforms early on and to stay the course, whatever challenges may be faced along the way. In this spirit, we must not lessen our efforts to create more jobs for Europeans and strengthen growth potential.”

Economy to accelerate gradually

Over the medium term, the key driver of economic growth is expected to be domestic demand. Personal spending should progressively push up economic growth as real income benefits from stabilizing labor markets and lower inflation, says the Commission.

Growth should also be boosted by a recovery in investment, with gains in both construction and equipment investment. Over the forecast horizon the contribution of net exports is expected to go down.

EU economists say the nature of this rebound is in line with recoveries that follow deep financial crises.

While on average financing conditions remain “benign”, considerable differences still exist across Member States and across companies of different size.

Unemployment will continue falling

After an improvement in labor market conditions, which began in 2013, the Commission forecasts further declines in unemployment and more job creation. Unemployment is expected to fall to 10.1% in the EU and 11.4% in the Eurozone in 2015.

Inflation is forecast to stand at 1% in the EU in 2014 and 1.5% in 2015, and 0.8% and 1.2% respectively in the Eurozone.

Continuous price competitiveness gains have been reported in all vulnerable Member States, with reductions in current account deficits. Some of these countries will have current account surpluses in 2014 and 2015.

General government deficits are set to continue, with a decline to approximately 2.5% of GDP both in the Eurozone and EU forecast for 2014. The debt-to-GDP ratio is expected to peak at nearly 90% in the EU and 96% in the Eurozone before declining in 2015.

The European Commission wrote in a press release:

“The largest downside risk to the growth outlook remains a renewed loss of confidence from a stalling of reforms. Also, uncertainty about the external environment has increased. On the other hand, further bold structural reforms could lead to a stronger-than-envisaged recovery.”

There is also a risk of persistent very low inflation. However, the gradual recovery, which is gathering pace and becoming increasingly broad based, should help push up inflation.

According to the Harmonized Index of Consumer Prices, very low inflation in Europe, especially within the Eurozone persists. Economists say that the Eurozone’s fragile economic recovery could be reversed if it tipped into a deflationary environment. During deflation consumers and businesses postpone purchases in the expectation of better deals later on, which slows down the economy.

Were the austerity measures too tough?

Many European lawmakers wonder whether the EU might have had a much better post-recession rebound if rather than implementing tough austerity measures, a US-style Keynesian investment program had been used.

The New York Times quotes Hannes Swoboda, president of the Socialists & Democrats group in the European Parliament, who said “The clear trend of shrinking unemployment shows that the U.S. did the right thing, investing during tough times rather than cutting all expenditure until the economy is paralyzed.”