Main messages "Expansion to continue amid new risks" Economic expansion set to continue in all Member States Labour market improvements continue Inflation expected to move up very gradually Public finances are improving further External downside risks have risen Source: Commissioner Moscovici's slides at the SF18 press conference on 3 May 2018 https://ec.europa.eu/info/publications/economy-finance/european-economic-forecast-spring-2018_en 2
The story behind the messages 1. Central scenario: "Expansion to continue amid new risks" central scenario roughly unchanged from previous forecasts higher growth contributions from net exports and investment downside risks have increased (e.g. financial shocks, protectionism) 2. Shaking off the crisis experience: a typical expansion? growth momentum in comparison with previous recoveries putting investment growth into perspective 3. The output gap, slack, and inflation: above-potential growth ahead? 4. Risks: Trade disputes could blow expansion off course 3
1. The central scenario Global expansion has strengthened Graph: Global GDP growth (excl. EU) with spillovers from procyclical US fiscal policy. Graph: US Federal Budget deficit and output gap (CBO April 2018 Budget update) 4
1. Central scenario (world trade, oil prices) Global trade has gained momentum in 2017 Graph: World import growth (excl. EU) Oil prices assumptions had to be revised up Graph: Oil price assumptions 5
1. Central scenario (financial markets) The stock market turmoil in early February 2018 was short-lived Graph: Stock market performance Bond yields slightly higher, but very low in historical perspective Graph: Benchmark 10y govt. bond yields 6
1. Central scenario (monetary policy) Monetary policy remains very accommodative Graph: Interest rates (EA) with the withdrawal of stimulus being discussed. Graph: GDP during current expansions in the US Graph: and Comparison in the EA of economic and monetary recoveries in the policy euro area and 115 in the US, real GDP index (start period = 100) (26th quarter) 15q4: first Fed rate hike (22nd) 14q4: Fed stops QE 110 105 100 (19th) 14q1: Fed slows QE (19th) 17q4 ECB decides to reduce APP EA (13q1-17q4) EA forecast (18q1-19q4) US (09q2-17q4) Quarters 0 2 4 6 8 10 12 14 16 18 20 22 24 26 Data sources: AWM database, Eurostat and European Commission's Spring 2018 forecast; FRED database for US data. 7
1. Central scenario (financing side) Cyclical upturn of bank lending continues Graph: Bank lending to households and non-financial corporations (EA) and should strengthen, the financial outlook suggests. NEW Table: Financing side euro area and EU (EU data not shown below) 8
1. Central scenario (GDP; current account) Main growth contributions from domestic demand Graph: Real GDP and components, euro area but the dependence on the external sector makes the economy vulnerable. Table: Current account balance (EA) 9
1. Central scenario (short-term outlook) Surveys and short-term data surprised on the negative side Graph: Confidence indicators, EU suggesting a lower growth momentum in the near term. Graph: Selected activity indices 10
1. Central scenario (private consumption 1/2) Private consumption of durables has lost momentum Graph: Private consumption, euro area (all EA MS Graph: Total and durable consumption (EA w/o SK) with quarterly ECFIN forecasts w/o SK) 6 5 4q-on-4q (%) but surveys hint on optimistic consumers Graph: Consumers' assessment of the past and future general economic situation (EA) 4 3 2 1 0-1 Consumption of durables Private consumption 14-Q1 14-Q3 15-Q1 15-Q3 16-Q1 16-Q3 17-Q1 17-Q3 11
1. Central scenario (private consumption 2/2) and with disposable incomes growing solidly Graph: Gross disposable income (GDI) and its components (EA) private consumption is set to grow steadily. Graph: Private consumption and consumer confidence, euro area 12
1. Central scenario (investment) 4 3 2 1 0-1 -2-3 -4-5 Investment activity has strengthened... Graph: Investment (EA excl. Ireland) Graph I.31: Investment developments, euro area excluding Ireland 5 pps. index, 2007 = 100 120 forecast 80 10 11 12 13 14 15 16 17 18 19 Construction Equipment Other Investment (y-o-y%) Investment (rhs) Equipment (rhs) 115 110 105 100 95 90 85...with equipment investment expanding strongly. Graph: Equipment investment and capacity utilisation (EA) 13
1. Central scenario (exports, GDP) Global demand growth supports European exports Graph: Global demand, exports and new export orders (EA) Overall, a slight moderation of growth in Member States Graph: Real GDP growth, EU and Member States 14
1. Central scenario (public finances) Aggregate headline and structural balances down Graph: Budgetary developments (EA) and deficits below 3% in 27 EU Member States in 2018. Graph: Budgetary map, 2018 (SF18) 15
2. A more typical recovery? 10 8 6 4 2 0-2 -4-6 A view on real GDP in the post-crisis years Graph: GDP during cyclical phases (EA) Graph: Real GDP during the recession and recovery phases (2008-Q1-2017-Q4), euro area % Great Recession Interim recovery Euro area recession Current recovery and expansion 08 09 10 11 12 13 14 15 16 17 Cumulative change during recovery/recession Cumulative change since 2008-Q1 and an assessment of the recovery years. Graph: Comparison of GDP recoveries (EA) 16
2. A more typical recovery? (investment) 20 15 10 5 0-5 -10 A view on investment in the post-crisis years Graph: Investment during cyclical phases (EA) Graph: Investment during the recession and recovery phases (2008-Q1-2017-Q4), euro area % Great Recession Interim recovery Euro area recession Current recovery and expansion 115 110 105 100 and an assessment of the recovery years. Graph: Comparison of recoveries in the euro area, gross fixed capital formation, 1970-Q1-2017-Q4 Graph: Comparison of investment recoveries (EA) index (start period=100) 1975-Q1-1980-Q1 1982-Q3-1992-Q1 1993-Q3-2008-Q1 2009-Q2-2011-Q3 2013-Q1-2017-Q4-15 -20 08 09 10 11 12 13 14 15 16 17 Cumulative change during recovery/recession Cumulative change since 2008-Q1 95 Quarters 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Note: Recoveries according to decisions by the CEPR Business Cycle Dating Committee (data sources: AWM database and Eurostat) 17
3. Slack and inflation Above-potential growth is forecast to continue Graph: GDP growth, actual and potential (EA) 2.5 pps. Graph I.21: GDP growth, actual and potential (with contributions), euro area as the job-rich recovery enters its sixth year Graph: Comparison of recoveries, employed persons (EA) 2.0 1.5 forecast 1.0 0.5 0.0-0.5-1.0 10 11 12 13 14 15 16 17 18 19 TFP Capital accumulation Changes in hours per empl Labour (persons) Potential GDP (y-o-y%) Pre-crisis ('02-'07) (y-o-y%) Actual GDP (y-o-y) 18
3. Slack and inflation (shortages vs. slack)...with increasing concerns about labour shortages Graph: Labour seen as limiting factor of activity (EA) 20 18 16 14 12 10 8 6 4 2 0 Graph I.42: Labour seen as limiting factor of activity, euro area % (s.a.) 08 09 10 11 12 13 14 15 16 17 18 Industry Services Construction as slack is receding slowly in the euro area Graph: Underemployment (EA) 19
3. Slack and inflation (part-time, unemployment outlook) and the share of part-time work is roughly stabilising. Graph: Part-time employment as a share of total employment since 2008-Q1 (EA) Ahead, lower employment growth and smaller declines in the unemployment rate 20 Graph I.22: Unemployment rates, EU and Member States (2017-2019) Graph: Unemployment rates (EU and MS) % forecast 2017 2018 2019 15 10 7.6 7.1 6.7 5 0 Other MS EU28 NL PL UK IT DE ES FR The bars for all NL 28 current Member States PL are ranked by size. UK 20
3. Slack and inflation (HICP, seasonal factors) HICP inflation has remained subdued Graph: HICP headline and core inflation (EA) Graph: HICP inflation (headline and core), euro area 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 y-o-y % Quantitative easing (March 2015-...) 11 12 13 14 15 16 17 18 HICP (all items) HICP (all except energy and unprocessed food) driven by energy prices and seasonal factors Graph: Package holidays inflation in March and April, Graph contributions I.46: Package holiday to HICP inflation inflation March and (EA) 0.20 0.15 0.10 0.05 0.00-0.05-0.10-0.15 pps. * April, contributions to HICP (euro area) * * 10 11 12 13 14 15 16 17 18 March April * Months in which the Good Friday week started. * * * * * * 21
3. Slack and inflation (wages and inflation outlook) and wages rising gradually as the output gap closes. Graph: Wage growth and services inflation (EA) 3 HICP inflation should rise slightly by 2019 Graph: Inflation rates (EA and MS) Graph I.51: Inflation rates, euro area and Member States (2015-19) 4 % forecast 2015 2016 2017 2018 2019 2 1.5 1.5 1.6 1 0 0.0 0.2-1 -2 Other MS Euro Area IT DE ES FR Note: in each period, the bars for all 19 euro area economies are ranked by size. 22
4. Risks ( Trade disputes could blow expansion off course ) Risks to growth higher and tilted to the downside Graph: Fan chart, euro area GDP (SF18) as (interrelated) external downside risks intensified. External risks (-) Unwarranted effects of the US fiscal stimulus (e.g. faster Fed tightening) (-) Global financial market stress / pickup in yields (-) Trade disputes and protectionism (-) Geopolitical tensions Domestic risks (-) Outcome of the Brexit negotiations (+) Stronger-than-expected investment expansion 23
"Expansion to continue amid new risks" in all MS Graph: EU growth map, 2018 (SF18) Final remarks with a special factor to be watched in June/July 2018. Table: Real GDP, 2008-2017 (Total percentage change) E uro area M ember S tates O ther E U M ember S tates (a) Football World Cup 2018 Qualified Not qualified 7.6 1.2 14.5 13.8 EU Member States 9. 8 3.1 (a) UK GDP used for team England. 24