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04 February 2016

European Commission: Winter 2016 Economic Forecast

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The European economy is now entering its fourth year of recovery and growth continues at a moderate rate, driven mainly by consumption.

The Commission's winter forecast shows that the overall growth outlook has changed little since the autumn but that the risk that growth could turn out worse than forecast has risen, mainly as a result of external factors. In the euro area, growth is projected to increase to 1.7% this year from 1.6% last year, and to climb to 1.9% in 2017. EU economic growth is forecast to remain stable at 1.9% this year and rise to 2.0% next year.

Certain factors supporting growth are now expected to be stronger and last longer than previously assumed. They include low oil prices, favourable financing conditions and the euro's low exchange rate. At the same time, risks to the economy are becoming more pronounced and new challenges are surfacing: slower growth in China and other emerging market economies, weak global trade as well as geopolitical and policy-related uncertainty. [...]

More supportive fiscal stance; deficits decline further

The aggregate general government deficit in the euro area is expected to decline further thanks to stronger economic activity and, to a lesser extent, lower interest expenditure.

In the euro area, the general government deficit is expected to have fallen to 2.2% of GDP in 2015 (EU 2.5%) and should fall further to 1.9% of GDP this year (EU 2.2%) and 1.6% of GDP in 2017 (EU 1.8%). The fiscal stance of the euro area is expected to become slightly more supportive to the economic recovery this year. In the EU, it is set to remain broadly neutral. The debt-to-GDP ratio of the euro area is forecast to decline from its peak of 94.5% in 2014 (EU 88.6%) to 91.3% in 2017 (EU 85.7%).

Further decline in oil prices temporarily drives down inflation

Annual inflation in the euro area was only slightly above zero towards the end of 2015, mainly due to a further drop in oil prices. Consumer price increases in the euro area are expected to remain very low in the first half of the year and should start picking up in the second half when the impact from the sharp fall in oil prices abates. For 2016 as a whole, euro area annual inflation is now forecast at only 0.5%, partly because wage growth remains subdued. Inflation is expected to pick up gradually and to reach 1.5% in 2017 as higher wages, higher domestic demand and a moderate pick-up in oil prices increase price pressures. [...]

Outlook is subject to increased risks

The economic outlook remains highly uncertain and overall risks are increasing. These include lower growth in emerging markets, a disorderly adjustment in China, and the possibility that further interest rate rises in the United States could cause disruption in financial markets or hurt vulnerable emerging economies and weigh on the outlook. A further fall in oil prices could also have a negative effect on oil-exporting countries and lower demand for EU exports. Risks from within the EU could also have an impact on confidence and investment. On the other hand, the combination of current supportive factors could translate into greater momentum than anticipated, especially if investment were to rebound.

Full press release

© European Commission

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