European Economy – Autumn 2017 Economic Forecast
The European economy has performed significantly better than expected this year, propelled by resilient private consumption, stronger growth around the world, and falling unemployment. Investment is also picking up amid favourable financing conditions and considerably brightened economic sentiment as uncertainty has faded. The economies of all Member States are expanding and their labour markets improving, but wages are rising only slowly.
The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%). The EU economy as a whole is also set to beat expectations with robust growth of 2.3% this year (up from 1.9% in spring).
Job creation has been sustained and labour market conditions are set to benefit from the domestic-demand driven expansion, moderate wage growth, and structural reforms implemented in some Member States. Unemployment in the euro area is expected to average 9.1% this year, its lowest level since 2009, as the total number of people employed climbs to a record high. Over the next two years, unemployment is set to decrease further to 8.5% in 2018 and 7.9% in 2019. In the EU, the unemployment rate is projected at 7.8% this year, 7.3% in 2018 and 7.0% in 2019. Job creation is expected to moderate, as temporary fiscal incentives fade in some countries and skill shortages emerge in others.
Real GDP growth accelerated in 2017, driven mainly by private consumption. Looking ahead, growth is set to decelerate but remain above potential. Unemployment fell to its lowest levels in more than twenty years in 2017 and is expected to remain low over the forecast horizon. Inflation has turned positive and is set to further pick up as the output gap widens. The budget deficit is projected to increase due to public wage increases projected in the unified wage law.
Private consumption is booming
Growth accelerated in 2017, with real GDP expanding by 5.8% (y-o-y) in the first half of the year. The pick-up in growth has been mostly driven by private consumption, spurred by tax cuts, significant hikes in both public and private wages, and low rates of inflation. Changes in inventories also made a substantial positive contribution to growth in the first half of 2017, while investment remained subdued mainly due to a slow uptake of projects financed by EU funds under the 2014-20 programming period. The booming private consumption also drove an acceleration of imports. As a consequence, net exports have worked as a drag on real GDP growth, despite relatively strong export growth.
Labour market tightening and inflation picks up
The economic expansion has prompted a continued improvement of the labour market, with the unemployment rate dropping to its lowest levels in more than twenty years. This low unemployment rate, coupled with a declining labour force and persistent skills shortages, has led to very tight labour market conditions. Wage growth has accelerated in 2017, also driven by a 16% minimum wage hike which took effect in February, as well as by public sector wage increases. This trend is projected to continue in 2018 given approved increases in public wages.
For further information: European Commission – Economic forecast