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Winter Economic Forecast: outlook improved but risks remain

Growth this year is forecast to rise to 1.7% for the EU as a whole and to 1.3% for the euro area. In 2016, economic activity should grow by 2.1% and 1.9% respectively.

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Outlook improved but risks remain

For the first time since the financial crisis in 2008-09, the economies of all European Union Member States are expected to grow again this year, according to the European Commission's winter forecast. Over the course of this year, economic activity is expected to pick up moderately in the EU and in the euro area, before accelerating further in 2016. Growth this year is forecast to rise to 1.7% for the EU as a whole and to 1.3% for the euro area. In 2016, annual growth should reach 2.1% and 1.9% respectively, on the back of strengthened domestic and foreign demand, very accommodative monetary policy and a broadly neutral fiscal stance.

An acceleration of economic activity to 2.0% and 1.7% respectively in 2016 is expected to be driven by the strengthening of the financial sector (following the comprehensive assessment by the European Central Bank and further progress towards the Banking Union), as well as recent structural reforms starting to bear fruit.

European Economic Forecast - Winter 2015 - GDP

Growth prospects across Europe are still limited by a weak investment environment and high unemployment. However, since the autumn, a number of key developments have brightened the near-term outlook. Oil prices have declined faster than before, the euro has depreciated noticeably, the ECB has announced quantitative easing, and the European Commission has presented its Investment Plan. All these factors are set to have a positive, though moderate, impact on growth.

Economic growth broad-based

While all Member States are expected to have positive growth rates this year and the recovery has continued to broaden in recent quarters, the divergence in economic performance across the EU is likely to continue. That is because the progress with reform implementation and deleveraging among banks, the public and private sectors still differs across Member States. The positive effect of low oil prices on growth will also vary according to each country's dependence on oil. The ECB's quantitative easing might have a stronger positive impact in countries where financing conditions are tight. The support to exports from the euro’s depreciation will depend on national trade orientation and patterns of specialisation. All in all, in 2015, the range of Member States' growth rates is expected to remain broad, from 0.2% (Croatia) to 3.5% (Ireland).

Inflation to fall further before rising in 2016

The trend towards low inflation has continued. In most Member States, inflation temporarily turned negative in December, on the back of the steep fall in oil prices. Inflation is set to remain subdued in 2015 as low commodity prices dampen the headline figure. Inflation should increase as of mid-2015 and in the course of 2016, as economic activity gradually strengthens, wages rise and the economic slack is reduced. In the EU, inflation is projected at 0.2% in 2015 and 1.4% in 2016. Inflation in the euro area is forecast to be -0.1% this year before rising to 1.3% in 2016.

European Economic Forecast - Winter 2015 - Inflation

Job creation accelerates but unemployment decreases only slowly

As economic growth gains momentum, so will net job creation, which has accelerated over the course of last year from a low level. Labour markets should improve towards the end of the forecast period. But economic growth is expected to be insufficient for a marked improvement. The unemployment rate is set to fall to 9.8% in the EU and 11.2% in the euro area in 2015. The labour market reforms undertaken in recent years are expected to continue bearing fruit and help unemployment rates decrease further in 2016.

European Economic Forecast - Winter 2015 - Deficit

Government deficits continue to fall

The reduction in general government deficits continues, but the fiscal stance is now neutral. The deficit–to-GDP ratios are forecast to keep falling over the next two years. In the EU, they are expected to fall to 2.6% this year from 3.0% in 2014 and to 2.2% in 2016. In the euro area, they should drop to 2.2% in 2015 and 1.9% in 2016. For the EU as a whole, the debt-to-GDP ratio is expected to have peaked at 88.4% in 2014. For the euro area, it should peak this year at 94.4%, before declining.

Uncertainty has increased

Overall, the uncertainty surrounding the existing economic outlook has increased. Downside risks have intensified, while new upside risks have emerged. This is due to geopolitical tensions, possible financial market volatility in a context of expected higher US interest rates, and incomplete implementation of structural reforms. A protracted period of very low or negative inflation would also be detrimental to the growth outlook. Upside risks include a stronger-than-expected boost to global and EU growth stemming from low oil prices.