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Brussels cuts growth forecasts as ‘protracted’ slowdown bites

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Via Financial Times

Brussels has cut its growth forecasts for the eurozone to their lowest level since the height of the bloc’s sovereign debt crisis, warning the slowdown will persist for at least the next two years. 

The European Commission on Thursday reduced its annual projection for eurozone GDP growth to 1.1 per cent in 2019 — down 0.1 percentage point from its last forecast and marking the lowest annual expansion since 2014. The commission also cut its projection for 2020 by 0.2 percentage points to 1.2 per cent. 

The commission issued a series of grim warnings about the health of the global economy, noting that international trade tensions, the risk of a disorderly Brexit and a weakening global manufacturing sector had led to a “protracted period of subdued growth and low inflation”. 

“Global growth is set to fall this year to a pace usually associated with the brink of recession,” warned the forecast. 

Unlike previous EU projections, the commission said it did not now expect any substantial pick-up in growth in the coming years, with GDP growth holding steady at 1.2 per cent in 2020 and 2021. 

“Economic activity now looks set to slow down in a number of member states, which at first appeared immune,” the commission said. “As the slowdown spreads, labour markets will lose steam. Wage growth may already have stopped increasing, leaving core inflation at persistently low levels.” 

Pierre Moscovici, Brussels’ economics commissioner, said the bloc’s expansion was hitting a “plateau” that he hoped would “not become a ceiling”. 

“The rebound probably won’t happen. We have to be prepared for the downside risks,” said Mr Moscovici. 

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Brussels highlighted a deterioration in trade relations between the US and China as one of the major downside risks for Europe in the coming months. However, Mr Moscovici said the outlook may have improved in the past week as Washington and Beijing aim to cool their tit-for-tat trade spat.

Some European governments such as Germany and the Netherlands are under pressure to raise their spending and expand their budget balances to counteract the slowdown. The commission’s projections show that Germany’s annual budget surplus will halve from 1.2 per cent of GDP in 2019 to 0.6 per cent in 2020 and fall again to 0.2 per cent in 2021 as Berlin embraces looser fiscal policy. 

Mr Moscovici noted there were “voices clamouring” for Germany to spend and invest as the European economy enters a “new period” of lower growth and rising global uncertainties. 

“I wouldn’t say it is grim. We are not preparing for a recession or a dark scenario but this growth is moderate,” said Mr Moscovici. He noted that all EU economies would expand to some degree in 2019 — the commission does not forecast an annual contraction for any EU nation. 

Of the eurozone’s major economies, Italy will suffer the worst growth rate at just 0.1 per cent in 2019, rising to 0.4 per cent next year. France’s expansion is projected to stabilise at 1.3 per cent in 2019 and 2020. Germany’s economic growth is expected to rebound from 0.4 per cent in 2019 to 1 per cent in 2020 and 2021.

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In a worry for Christine Lagarde, the new president of the European Central Bank, the projections show annual eurozone inflation will fall to 1.2 per cent for the next two years, persistently undershooting the ECB mandate of close to but below 2 per cent.

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