The EU economic outlook is strengthening. While leading indicators point to GDP growth gaining momentum in the near term, the conditions for a sustained recovery in the medium term are also improving. Growth is still set to remain moderate, but a gradual easing related to deleveraging, financial fragmentation, adjustment of external imbalances and uncertainty is noticeable.
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After a period of timid and scattered recovery, there are genuine signs that a more lasting upturn is now ongoing in the EU and the euro area. In recent months, confidence has improved and business indicators have remained above their long-term levels pointing to a recovery gradually gaining strength and spreading across the EU. Growth turned positive in a large majority of Member States over the course of last year and the outlook has improved even in the more vulnerable ones.
Real GDP growth is forecast to advance with moderation in 2014, at 1.6% and 1.2% respectively in the EU and the euro area, before gaining some further speed to respectively 2.0% and 1.7% in 2015.
In contrast to the sharp but short-lived upturn in 2010, the current recovery in the EU and euro area is more balanced regionally, as it involves also most of the vulnerable Member States. Real GDP growth in most EU countries is projected to be positive as of this year (with the exception of Cyprus and Croatia) and growth is expected to accelerate next year. Substantial, but receding, differences in economic performance will remain. Among the largest economies, economic growth is expected to be sustained in Germany while the recovery is firming in Spain and slowly gathering pace in France and Italy. In the UK, growth is becoming firmly established.
Conditions in the labour market have started to improve in 2013. However, with only limited economic expansion underway and the typical lag in response of employment to economic recovery, little net job creation is expected in the short term.
Employment growth in 2014 is expected to be limited, at 0.6% in the EU and 0.4% in the euro area, though slightly better than projected in winter. Unemployment rate in the euro area and the EU is forecast to decrease slightly this year. In 2015 the unemployment rate is projected to stand at around 10.1% in the EU and 11.4% in the euro area. Such a slow decline mirrors the gradual recovery but could also reflect a higher prevalence of structural unemployment than in the pre-crisis years. Significant differences will remain among EU countries over the forecast period. p>
The current low level of inflation in the euro area and the EU is set to remain for some time. Factors behind its subdued level are still at play: externally - falling commodity prices and the euro’s rising exchange rate, and internally, such as the weak economic environment, macroeconomic adjustment in a number of Member States, as well as the expiration of temporary tax and administered prices increases. From the low level of 0.8% in the euro area and 1% in the EU in the 2014, inflation will increase somewhat in 2015, to an average of 1.2% and 1.5% respectively.
While in the short run, low inflation can support GDP growth by increasing real disposable incomes, too prolonged a period of very low inflation increases the real value of both private and public debt and can raise real interest rates. It also makes the necessary relative price adjustment in the vulnerable Member States more challenging.
Following substantial fiscal consolidation in 2011-13, the fiscal policy stance is expected to be close to neutral in 2014. The deficit-to-GDP ratio is set to decrease further in both areas to around 2½% of GDP this year, as the recovery advances and additional deficit-reducing measures are being implemented by Member States. However, the fiscal effort, measured in terms of change of the structural balance, is expected to be broadly nil. The debt to GDP ratios of the EU and the euro area are expected to peak this year at 89.5% and 96.0% respectively, as continued improvement of primary surpluses, combined with stronger economic growth, are expected to put debt ratios on a downward path.
Overall, risks to the growth outlook remain tilted to the downside. On the domestic side, as the recovery advances, the risk that reforms crucial to the recovery’s continuation and strengthening may be put off also increases. On the external side, risks to the outlook for emerging market economies persist, especially for those most exposed to tighter financial conditions. Uncertainty has increased regarding China's growth prospects and possibly its financial stability. Tensions with Russia have increased geopolitical risks. Their impact will depend on the duration and gravity of the situation.Though HICP inflation could turn lower than envisaged, the probability of outright deflation remains very low. Upside risks to growth identified in the winter forecast are still valid. Stronger growth in domestic demand could materialise if confidence increases further and credit conditions improve faster than expected. The substantial structural reforms that were undertaken in recent years may also lead to better-than-expected labour-market results, particularly in the vulnerable Member States. This would also lead to a faster normalisation of inflation.