There were no major surprises in the forecasts the European Commission published today 
under the title “Gradual recovery, external risks”. The numbers in general do not differ a lot from our own. In our view, two points are most interesting: 1) The times where forecasters raise their GDP forecasts for the Euro area seem to be over; the Commission slightly lowered its expectation for next year. 2) Given a still significant output gap and limited room for manoeuvre for the ECB, the debate about how restrictive fiscal policy should actually be could soon flare up again.
The Commission expects the recovery in the Euro area to become more domestic-demand driven and robust in the course of 2014 and 2015 (as we do). In the Commission’s view, downside risks to growth prevail, as external risks have increased. The report mentions potential volatility and risk aversion in international financial markets linked to the uncertainty in US fiscal and monetary policy.
On inflation, the Commission gives a subdued outlook, with good reasons in our view. “… the recent decrease in core inflation, which had remained remarkably stable in the presence of large output gaps over the past years, could lead to a downward adjustment of short-term inflation expectations.”. The Commission expects the negative output gap to shrink to 1.4% in 2015.
A few more details:
- Growth: On the Euro area aggregate level, the Commission forecasts (2014/15: 1.1% (down from 1.2%/1.7%) slightly higher than our own (1%/1.5%). Germany should remain the fastest growing of the major Euro-area economies, with France coming close in 2015 (1.7% vs. 1.9% for Germany); we tend to be more cautious on France. For next year, the Commission expects growth rates between 0.5% and 1% for Italy, Spain, Portugal and Greece. So it will still be a multi-speed recovery – and no recovery in Slovenia and Cyprus, where GDP is expected to shrink.
- Unemployment is expected to remain very high: 11.8% in the Euro area in 2015 (around 25% in Spain and Greece, above 11% in France and Italy. For 2015, employment is expected to grow in all Euro-area countries, except Slovenia.
- Prices and wages: Consumer price inflation is expected to remain clearly below 2% (1.5% in 2014, 1.4% in 2015). Unit labour costs are expected to increase by only 0.7%/0.8% and to decrease both in 2014 and 2015 in Spain, Portugal, Greece and Ireland.
- Public finances: Fiscal policy is expected to be restrictive in 2014 – but not in 2015. The Commission expects the cyclically-adjusted primary balance of the Euro area to improve this year and next, but the surplus should decline in 2015, which would be good for growth. For France, the Commission expects a (headline) fiscal deficit above 3% also for 2015, which – under current agreements – would be out of line with the stability and growth pact. Unless policy makers in Europe decide that fiscal policy should be less restrictive.
Nordea