Europe's economic recovery, which began in the second quarter of 2013, is expected to continue spreading across countries and gaining strength while at the same time becoming more balanced.
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The EU economy has returned to positive growth in the second quarter of 2013, and continued to recover at a measured pace in the second half of the year. Short-term indicators suggest a continued economic expansion in the coming quarters. However, the main impediments to growth stemming from the crisis – high debt, financial fragmentation, uncertainty and difficult adjustment - are only slowly receding, and the global economy is projected to grow at just a moderate pace.
A slow and fragile recovery is ongoing in the EU and the euro area. GDP continued to expand in the third and fourth quarters, though at a modest pace. Looking ahead, GDP is expected to grow by 1.5% in the EU and 1.2% in the euro area this year, before speeding up more markedly in 2015 to 2.0% and 1.8% respectively.
The recovery is expected to become increasingly driven by domestic demand and to spread across EU Member States. Domestic investment and consumption are set to continue firming this year and next, replacing net exports as the main driver of growth. Differences in the expected rates of growth across the EU are to narrow, particularly as the recovery has now reached the large majority of Member States, including those most affected by the crisis.
After declining for almost two years, employment stabilised in the second quarter of 2013 and remained unchanged in the third quarter, while unemployment rates have stopped increasing since mid-2013. The subdued recovery of economic activity is expected to lead to only a minor positive impact on employment in 2014 (0.3% and 0.5% respectively in the euro area and the EU), but more visible ones in 2015 (0.7% in both zones). After being on the rise since 2009, the unemployment rate is expected to slightly decline in 2014, to 12.0% in the euro area and 10.7% in the EU. In 2015, unemployment is expected to slowly decline further to 11.7% in the euro area and 10.4% in the EU, remaining at historically high levels. While growth differentials are expected to narrow over the forecast horizon, large differences in labour market performances are set to persist. In 2015, unemployment rates are expected to range from 4.7% in Austria to 24.6% in Spain, reflecting divergent output developments, as well as different responses of employment to output.
Disinflation continues… In the EU and the euro area, consumer-price inflation has been trending downwards throughout 2013 on the back of falling energy prices, together with still weak economic conditions. In 2013, HICP inflation averaged 1.5% and 1.4% respectively in the EU and the euro area, compared to 2.6% and 2.5% in 2012. Looking ahead, with the underlying price pressures likely to remain suppressed, average annual HICP inflation in 2014 is predicted to ease further in both areas on the back of weak demand in the current cyclical phase, reinforced by relative price adjustments in the EU.
After front-loaded fiscal consolidation in recent years, headline deficits are projected to keep falling, although at a gradually slowing pace, over the forecast horizon. This pattern of consolidation is consistent with the on-going correction of excessive deficits. As a result of the significant fiscal consolidation achieved by several Member States, the deficit-to-GDP ratio in 2013 is forecast to have decreased by 0.4 pp. in the EU and by 0.6 pp. in the euro area, reaching 3.5% and 3.1% of GDP respectively. Headline deficits are set to shrink further in 2014 and to stabilise in 2015, as the recovery slowly broadens. The fiscal deficit is expected to fall to 2.7% of GDP in 2014 in the EU and to 2.6% in the euro area, and to remain roughly at these levels in 2015.
Growth could be lower than envisaged if fiscal, institutional or structural reforms stall or are not delivered in a timely way at Member-State or European level, resulting in a renewed loss of confidence. Downside risks could also stem from heightened instability in emerging markets' financing conditions, notably related to the implementation of a less accommodative monetary policy in the US. The impact has so far been concentrated in emerging market economies with comparatively weak macroeconomic fundamentals, but a more generalised shift in investor sentiment and re-assessment of risk cannot be excluded.