Slower growth with increased risks and uncertainty was a common theme in the European Commission’s Autumn 2018 Economic Forecast and the IMF’s Regional Economic Outlook for Europe. Both look for a deceleration in the rate of growth in the Euro Area: the IMF forecasts growth of 2% in 2018 falling to 1.9% in 2019 and 1.7% in 2020. The EC is slightly more optimistic with Euro area growth of 2.1% in 2018 but also has growth falling to 1.9% and 1.7% in 2019 and 2020.
The IMF noted that ‘the external environment has become less supportive and is expected to soften further in 2019 owing to slowing global demand, trade tensions, and higher energy prices. Tighter financial conditions in vulnerable emerging market economies and maturing business cycles are also weighing on activity.’ They also cited risks from factors such as delayed fiscal adjustment and structural reform along with demographic challenges and warned that a ‘no deal’ Brexit would have negative consequences for growth.
The European Commission also pointed to risks and uncertainty clouding the outlook: ‘Overheating in the US, fuelled by pro-cyclical fiscal stimulus, could lead to interest rates rising faster than expected, which would have numerous negative spillover effects beyond the US, particularly in emerging markets which are vulnerable to changes in capital flows and exposed to US dollar denominated debt. This could exacerbate financial market tensions. The EU could also suffer given its strong trade links and banks' exposure.’ Other risks include Brexit, trade tensions between the US and China and the potential for concerns about public finances in highly indebted Member States to weigh on economic activity.
The growth figures for the UK were also of interest: the EC forecast growth of 1.3% this year falling to 1.2% in 2019 and 2020 based on an assumption of the status quo in trading relations between the UK and EU27. The IMF also expects UK growth to ease to 1.4% this year but then edge up to 1.5% in 2019 and 2020. UK 3Q’18 GDP, released today, showed quarterly growth picked up to 0.6% from 0.4% in 2Q and was the strongest quarterly growth figure since Q4’16. However, it also pointed to a slowdown: July was strong helped by the hot weather and world cup but growth stagnated in August and September. Business investment fell for the third successive quarter.