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Autumn forecast 2013 - EU economy: Gradual recovery, external risks

The EU economy has started growing again. Following a slow expansion of economic activity during the remainder of 2013, growth is set to become more robust in 2014 and 2015.

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Abstract

After several quarters of contracting activity, the European economy has started growing again in the second quarter of this year. Over the past months, there have been encouraging signs that the economic recovery will continue. The legacy of the crisis will continue weighing on growth, but its impact is expected to gradually subside over the forecast horizon.

Growth is forecast to gradually gather pace

Growth in the second half of 2013 is expected at 0.5% compared to the same period 2012 in the EU. On an annual basis, real GDP is expected to remain unchanged in the EU and to contract by 0.4% in the euro area in 2013. Looking ahead, economic growth is forecast to gradually gather pace over the forecast horizon, estimated at 1.4% in the EU and 1.1% the euro area in 2014, reaching 1.9% and 1.7% in 2015, respectively.

European Economic Forecast - Autumn 2013 - GDP

The internal and external adjustment in Europe is continuing, underpinned in many cases by significant structural reforms and fiscal consolidation implemented in recent years. Domestic demand is expected to gradually take over as the main engine of growth in Europe, also against the background of a weakened outlook for emerging market economies. Yet, the return to solid growth will be a gradual process, and the aggregate figures for the EU and the euro area mask substantial differences across Member States. The latter reflect the unequal severity of the initial crisis and the related differences in adjustment needs, as well as more long-standing trends in the determinants of potential growth.

Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro: "There are increasing signs that the European economy has reached a turning point. The fiscal consolidation and structural reforms undertaken in Europe have created the basis for recovery. But it is too early to declare victory: unemployment remains at unacceptably high levels. That’s why we must continue working to modernise the European economy, for sustainable growth and job creation."

Labour market conditions stabilise

The recovery is expected to translate only gradually into job creation. This year, the labour market continues to be characterised by very high unemployment in some countries and still declining employment, as labour market developments typically lag those in GDP by half a year or more. However, in keeping with this pattern, recent months have seen labour-market conditions starting to stabilise. The outlook is for a modest decline in unemployment towards 10.7% in the EU and 11.8% in the euro area by 2015. But cross-country differences are expected to remain very large with unemployment ratios projected to range from 5% (Austria) to more than 26% (Spain) in 2014.

European Economic Forecast - Autumn 2013 - Unemployment

Inflation expected to be subdued

Subdued consumer-price inflation is expected to prevail over the forecast horizon under the technical assumption of slowly decreasing oil prices and unchanged exchanged rates. Inflation in the euro area is expected at 1.5% in 2013 and 2014. In the EU the outlook is for 1.7% and 1.6%, respectively.

European Economic Forecast - Autumn 2013 - Unemployment

The pace of fiscal consolidation is slowing down

The reduction in general government deficits is set to continue: In 2013, fiscal deficits are projected to fall to 3.5% of GDP in the EU and to 3.1% in the euro area. After the large consolidation efforts in 2011 and 2012, the pace of consolidation is now easing. The structural budget deficit, i.e. the general government deficit corrected for cyclical factors, one-offs and other temporary measures, is forecast to decline in 2013 by about ½% of GDP in both areas, after decreasing by 1½% in the euro area and 1¼% in the EU last year. In line with the projections for deficits and growth, debt-to-GDP ratios are still rising and expected to peak in 2014, at around 90% in the EU and almost 96% in the euro area.

European Economic Forecast - Autumn 2013 - Deficit

Implementation of reforms is crucial

Irrespective of the mostly positive news coming from the latest economic data, downside risks to the GDP forecast still prevail as the macro-financial situation remains fragile. The continued implementation of structural reforms and further steps to strengthen the EMU architecture remain crucial to prevent a return of stress in financial markets and negative feedback loops.