Remarks by Commissioner Gentiloni presenting the Winter 2020 Economic Forecast - Hoofdinhoud

Key messages from the Winter 2020 Economic Forecast

Good morning. I am pleased to present you the Commission's winter economic forecast for 2020 and 2021.

I have four main messages for you today.

First, the European economy continues to show resilience to the challenging external environment. Slow growth is continuing, driven by domestic demand.

This expansion is now the longest since the introduction of the euro in 1999 (almost 7 years).

We forecast that economic growth will remain low and stable at 1.2% this year and next - unchanged from 2019.

Growth in the EU as a whole - that is the 27, without the UK - is forecast to ease marginally from 1.5% in 2019 to 1.4% in both 2020 and 2021.

The economies of all EU Member States are set to grow in both 2020 and 2021.

Second message, the various economic forces that have emerged in recent months have largely offset one another. As a result the outlook is broadly unchanged since the autumn, which in itself is good for those who are doing the forecast!

Looking back at 2019, growth surprised positively in the third quarter, but this was followed by the lower-than-expected outturn in the fourth quarter.

Going forward, the outlook for the European economy remains challenging.

On the positive side, there are tentative signs of stabilisation in global trade and encouraging developments on the US-China trade front. There is also clarity about trading relations between the EU and the UK, but this is only from now until 31 December this year.

At the same time, still elevated policy uncertainty and geopolitical tensions continue to weigh on global growth prospects.

Overall, considering all these developments, our forecast for both the euro area and the EU in 2020 and 2021 remains largely unchanged from the Autumn.

Third message, we have revised our inflation forecast marginally higher. This reflects slightly higher oil price assumptions than last autumn. It also reflects a pick-up in core inflation, providing some tentative evidence that higher wages are starting to lead to higher prices.

Finally, fourth message, the outlook for the EU economy is subject to new downside risks, first and foremost the outbreak and spread of the coronavirus. Its impact on public health, human lives and economic activity remains uncertain. This will depend very much on the duration of the outbreak and of the containment measures enacted, and on policy measures taken by China.

European GDP growth stable at subdued levels

Data for the second half of 2019 make it clear that domestic growth drivers remained largely intact - particularly private consumption, which underpinned euro area's slow growth throughout 2019. Household incomes continued to benefit from improvements in the labour market, as well as wage increases. In several countries, fiscal measures have additionally supported incomes.

We expect private consumption to sustain its current momentum this year. This reflects the still favourable outlook for the labour market, wage settlements and above-average consumer confidence.

Investment is expected to continue growing, but at a very moderate pace. Demand for investment goods remains subdued, both at home and abroad. On the positive side, low financing costs should spur construction investment. And schemes like InvestEU and the Green Deal Investment Plan are also set to exert a positive effect on investment decisions.

Following a very weak 2019, our external environment is set to remain subdued. Foreign demand should strengthen but only modestly. Combined with still high policy uncertainty, this is set to weigh on the trade outlook in the euro area. This makes it unlikely that the euro area will benefit from external growth drivers in the next two years.

Tentative signs of stabilisation in the global economy

Global growth remained subdued throughout 2019, but there are hints of a bottoming-out. The volume of trade in goods rebounded modestly in the third quarter, after contracting for three quarters in a row. Forward-looking global trade indicators have also been showing tentative signs of improvement. Global manufacturing sentiment also seems to have stabilised at the end of 2019, thanks to more new orders and export orders.

This stabilisation in global business sentiment partly reflects supportive macroeconomic policies as well as some de-escalation of trade tensions, thanks to the adoption of the “Phase One” trade deal between the US and China. Still, persistent uncertainty associated with US trade policies continues to cloud the outlook for global trade.

You are of course very interested in our take on the economic impact of the coronavirus. The fact is that any assessment of this is subject to large uncertainty. For this forecast, we have assumed that China's GDP will be affected mostly in the first quarter of 2020, with relatively limited global spillovers. This is an assumption - not a forecast - which is obviously subject to downside risks should the outbreak last longer, or worsen further.

Overall, the outlook for global growth outside the EU is broadly unchanged since the autumn. Global GDP growth, excluding the EU but including the UK, is projected to gradually pick up from 3.1% in 2019 to 3.3% in 2020 and 3.4% 2021. This modest rise should be led by a moderate firming of growth in emerging market economies.

World imports of goods and services excluding the EU are forecast to increase by 2.1% and 2.6% in 2020 and 2021, respectively, after an estimated growth rate of just 0.4% last year.

Manufacturing: mixed signals

Incoming data confirm that the weakness in euro area manufacturing continued through the end of 2019 while other sectors, including services and construction, have shown resilience.

We have now been seeing these sectoral divergences for almost two years.

Recent months showed clear divergence of sentiment indicators and hard data. The December 2019 industrial production figures published yesterday by Eurostat showed a marked decline.

At the same time, survey indicators such as the Commission's industry confidence, but also the Purchasing Managers' Index, have moved up in recent months. Still, they remain well below long-term averages, supporting the view that an actual upturn has yet to materialise.

Labour market holding up

In 2019, the euro area labour market has been fairly resilient given the background of moderate growth.

Euro area unemployment decreased to 7.4% in December, the lowest rate since May 2008.

However, since the labour market situation usually lags economic activity, further increases in employment appear limited.

The Commission's survey on employment expectations suggests an easing of job creation, particularly in manufacturing, and hints at a stabilisation in the services sector.

Inflation revised up marginally

Euro area inflation remains low, though it picked up at the turn of the year. Our projection has been revised up slightly to 1.3% in 2020 and 1.4% in 2021, reflecting recent upward surprises in services and food inflation, as well as slightly higher oil price assumptions.

Core inflation in the euro area, which excludes energy and unprocessed food, firmed from 1% to around 1¼% in the fourth quarter 2019 as well as in January. This moderate pick-up reflects higher price rises for services.

Growth map 2020 & 2021: Expansion in all Member States

As I mentioned, we expect all 27 EU economies to grow in both 2020 and in 2021, with the expansion in the euro area now the longest since our single currency's launch.

The growth map continues to show heterogeneity across EU Member States. Most Central and Eastern European economies are expected to grow faster than the large euro area countries.

The German economy was particularly hit last year by weaker export growth and the downturn in manufacturing.

German exports are expected to recover only slowly over the next two years, as the demand for vehicles and investment goods is likely to remain weak.

However, the buoyant services and construction sector, strong wage growth and some fiscal easing are set to continue supporting domestic demand.

Overall, growth is forecast to reach 1.1% in 2020, helped by a strong calendar effect (0.4 percentage points). Next year the manufacturing sector is expected to return to growth and benefit from more favourable external demand. This should help GDP growth consolidate at 1.1% in 2021.

In France, growth decelerated sharply and was even slightly negative in the fourth quarter of 2019.

Not surprisingly, the widespread strikes impacted French growth, as did maintenance works at a refinery.

Going forward, the French economy is set to rebound to a relatively stable quarterly growth rate of around 0.3% over the next two years and to grow at 1.1% in 2020 and 1.2% in 2021.

In both years, domestic demand, and private consumption in particular, are expected to remain key growth drivers.

By contrast, net exports are set to continue weighing on growth in 2020 and to turn only broadly neutral in 2021.

In Italy, after four quarters of slowly rising growth, the economy contracted by 0.3% in the last quarter of 2019, according to ISTAT's preliminary estimate.

Services seem to have held up, while industrial production declined. On the plus side, manufacturing is expected to stabilise and financing conditions are more favourable.

Growth in Italy is expected to gradually gain traction from 0.2% in 2019 to 0.3% in 2020 and 0.6% in 2021.

In Spain, growth held up better than expected in the second half of 2019, with robust contributions both from domestic demand and net exports. The economy thus grew 2.0% in 2019 as a whole. Resilient private consumption and recovering investment should allow growth to reach 1.6% in 2020 and 1.5% in 2021, above the euro area average and slightly higher than projected in the autumn.

And in Poland, growth remained buoyant in 2019 at 4.0%, driven by domestic demand and investment in particular. Growth is expected to ease to a still solid 3.3% in both 2020 and 2021. Strong private consumption growth is set to support activity, reflecting favourable labour market developments, strong consumer confidence and fiscal stimulus.

Overall balance of risks still to the downside

The balance of risks to this forecast remains tilted to the downside. The euro area economy still faces a high degree of uncertainty, particularly regarding trade policies and the external environment.

Firstly, the outbreak and spread of the coronavirus and its economic impact is a key downside risk.

The fact that the duration and severity of the outbreak are unknown at this stage generates uncertainty over the near-term economic prospects in China and abroad.

This uncertainty comes with broad-based global ramifications for manufacturing, with its cross-border supply chains.

But it also has implications for services, including transport and tourism, both in and out of China.

What is clear is that the longer the outbreak lasts, the higher the likelihood of knock-on effects on economic sentiment and global financing conditions.

Secondly, both economic and trade-policy uncertainty remain high despite the recent US-China trade deal. Trade tensions could re-escalate and new trade barriers could be enacted. This could lead to a reversal of risk sentiment and tighter financing conditions.

Third, there is still considerable uncertainty about future relations between the EU and the UK after the expiration of the transition period at the end of this year. An abrupt change in trading and other economic relations would weigh on growth, mainly in the UK but also in the EU.

Fourth, we are mindful of the risks posed by geopolitical tensions in the Middle East, including of course swings in oil prices. Political and social turmoil in Latin America has also resurfaced, which risks postponing the expected recovery in this region.

Finally, a reassessment of risks by financial markets or a change in their expectations could impact financial conditions and capital flows. This could affect especially emerging markets but also countries such as the US, where corporate debt is at a record high. Such a development would weigh on the fragile recovery in global business confidence.

Let me end my presentation by mentioning two upside risks for the European economy.

First, we may see more growth-friendly fiscal policies both in emerging markets and domestically, connected both to our growth strategy and the Green Deal.

And second, we may still see positive spillovers from more benign financing conditions in some euro area countries.

So to conclude, the outlook for Europe's economy is for stable, albeit subdued growth over the coming two years. This will prolong the longest period of expansion since the launch of the euro. But we still face significant policy uncertainty, which casts a shadow over manufacturing in particular. As for the coronavirus, it is too soon to evaluate the extent of its negative economic impact.

Thank you.