Eurozone economy seen slowing through to 2020


Economic growth across the 19-country eurozone is expected to moderate over the next few years amid rising trade tensions around the world and higher oil prices, according to updated forecasts from the European Union.
The EU’s executive Commission said Thursday that eurozone growth this year is expected to moderate to 2.1 percent from last year’s decade-high rate of 2.4 percent. It then expects a further easing to 1.9 percent in 2019 and 1.7 percent in 2020.
It blamed rising global uncertainty, international trade tensions, and higher oil prices for the slowdown. It also said a slower pace in the fall in unemployment could add to the dampening effect. Unemployment is projected to fall from 8.4 percent this year to 7.9 percent next and 7.5 percent in 2020.
The Commission said that economic growth will become increasingly reliant on domestic factors, with consumer spending benefiting from stronger wage growth and looser budget measures in some countries.
“Uncertainty and risks, both external and internal, are on the rise and start to take a toll on the pace of economic activity,” said Valdis Dombrovskis, the commissioner responsible for financial stability and other economic matters.
“We need to stay vigilant and work harder to reinforce the resilience of our economies.”
The European Union has put numbers on its frustration with Italy.
After weeks of accusing Rome of too-optimistic assumptions about the effect of its spending plans, it said Thursday that economic growth next year will be weaker than the government targets, and the nation’s budget deficit will move dangerously close to the EU limit of 3 percent.
The report, part of an overview of the European economy, marks another shot in the dispute between authorities in Brussels and Italy’s government over the latter’s expansionary budget. The government says its measures are needed to support an economy that’s underperformed the euro area for years and boost the incomes of its people, but the EU and investors are worried what that will do to the country’s mountain of debt.
While the EU’s forecast language is gloomy, the reality may turn out to be worse.
“Even the EU forecasts themselves look too optimistic,” said Lorenzo Codogno, visiting professor at London School of Economics and a former chief economist at the Italian finance ministry. “The impact of higher borrowing costs on the banks’ loan rates is set to limit economic growth even further.”
In the report, the European Commission forecasts:
  • Economic growth of 1.2 percent next year, below the populist government’s target of 1.5 percent.
  • Weaker expansion has implications for the budget deficit, which is seen widening to 2.9 percent next year and 3.1 percent the following year. The government’s targeted 2.4 percent deficit for 2019 was flatly rejected by the commission.

Two Points of View

European Commission and Italy's government don't agree on budget forecasts
Source: European Commission and Italian Government
It said the growth outlook is subject to “high uncertainty amid intensified downside risks,” including a further jump in government borrowing costs. Italy’s fiscal targets have already sent Italian bond yields to a four-year highs.
Italian bonds extended losses after the report with the 10-year yield rising 7 basis points to 3.41 percent and pushing the spread with equivalent German bunds to 296 basis points.
Given the “fiscal deterioration” and risks to growth, the EU also said Italy’s large debt-to-GDP ratio won’t decline through 2020. The EU wants Rome’s budget plans revised, but the government is refusing to yield.

Two Points of View

European Commission and Italy's government don't agree on debt forecasts
Source: European Commission and Italian Government
The commission warned about the impact of higher debt-financing costs on lenders, singling out Italy as one of the “high-debt euro area countries” where “disruptive sovereign-bank loops could also re-emerge in case of doubts about the quality and sustainability of public finances.”
Finance Minister Giovanni Tria signaled this week that the government is not ready to budge on its controversial budget even as his euro-area counterparts called on Italy to prepare revised spending plans.
Still, he told reporters after a Monday meeting in Brussels that the government will pursue a dialogue with the Commission. In setting the Nov. 13 deadline for a resubmitted budget, the commission said the original plan constituted a clear deviation from EU rules.
Tria will meet on Friday in Rome with Portugal’s Mario Centeno, the head of the Eurogroup of finance ministers.