Scary movie – Brussels style
Holy Moly – the latest economic forecast from the European Commission is one of the scariest I have seen from any major forecaster for some time. You want me to be more precise – OK, what about 2009? That’s the last time the global economy was growing as slowly as it is now.
As for the risk of something bad blowing up, like it did back then, well have a look at this line from Marco Buti, the top Eurocrat in charge of the European Commission’s Economic directorate General: “Policy makers need to stand ready to react swiftly and decisively to the potential materialisation of multiple, large and inter-related downside risks”
So fasten your seatbelts, this could be a rough ride. Don’t be fooled by the China-busting 7.8% GDP growth Ireland had last year, or the Europe-leading 4.8% forecast for this year – the potential for things to turn really bad, really fast hasn’t been this high since Lehman Brothers was open for business.
The bad news comes in two broad categories – economic factors, and non-economic factors, such as war and wrong policy choices by politicians (which sometimes lead to war), and Brexit – even the fact that the UK is holding a referendum does appear to have had a negative impact on the UK economy (and that of the wider EU as well). But let’s stick to the economic factors.
The baseline forecast is for slow but steady growth in the Euro area and EU – but the risks to the forecast are mostly on the downside. And Buti writes: “the uncertainty surrounding the forecast is extraordinarily high considering that we are in an expansion phase”.
The lift from cheap oil is set to wane as the year goes on, and the lagged boost from the euro’s depreciation will soon have run its course. Inflation is also forecast to pick up (as it has been – wrongly – most years now), which will limit real terms gains in disposable income. As a result, the pace of private consumption growth – the main driver of growth so far – is forecast to slow down next year. Only a rise in employment and modest wage increases can help to offset the weakening. And the main support for growth will once again be the ECB’s monetary policy – you know, the one Mario Draghi keeps telling us can’t do all the heavy lifting on its own. That one.
What about exports, you ask? Well that story is already over. Net exports from the Euro Area turned negative last year, subtracting from growth, which was entirely driven by domestic demand. Net trade was a drag on growth in the Euro Area last year, and export growth is expected to slow down markedly this year, due to the appreciation of the euro and the slowdown in external demand – global import growth last year was a meagre 0.5%. The Commission expects the same pattern next year, but domestic demand may see some rebalancing as consumer spending moderates (see above) and investment picks up.
But not by much. Investment accelerated strongly towards the year end, but seems to have been driven by temporary factors. It is expected to moderate this year, held back by expectations of weak global demand and the considerable uncertainties that are out there. And you know you are on thin ice if the Commission points out that one of the big drivers in an uptick in government spending last year was the refugee crisis – they are even talking it up as a possible driver of house construction in some states as a medium term positive.
Global growth has fallen to 3.2% for last year – the slowest pace since 2009. And it’s only expected to pick up very modestly over this year and next (2.2% and 3.7%).
We have all heard about the growth problems in China, Brazil and Russia – resulting in emerging market economies growing at their lowest level since…2009. But the advanced economies have also lost momentum towards the end of last year, and growth is expected to remain at 2% this year.
For the United States, the Commission says weak external demand is slowing down its export performance, which is in turn slowing down US imports, which of course is bad for EU exports.
The Government deficit for the Euro Area is expected to continue to fall, thanks to the modest growth in the economy, the improving labour market and lower interest costs for governments. The slightly lower than expected pace of decline in the deficit last year was due to some tax cuts on labour in some countries (including Ireland) and higher spending in refugees in other states. The deficit was 2.1% of GDP last year, and is expected to fall to 1.9% this year and 1.6% next year (on a no policy change basis). This is well inside the Maastricht Treaty limits for deficit spending.
The Euro Area is also running a current account surplus of 3.6%, so it’s in the money in its dealings with the rest of the world. In Ireland the surplus last year was 4.4%, in Germany 8.8% and in the Netherlands 9.2% (isn’t there a law against that sort of thing?). By contrast the USA has a current account deficit of 3.3% while the UK’s current account deficit is 5.2%. Then again their unemployment rates are half that of the Euro Area. Such are the results of prioritising growth over book-keeping, aided by the early adoption of expansionary monetary policy.
So that’s the good news. Real GDP in the Euro Area has now risen above its pre crisis level. Though in the finest traditions of the dismal science, Marco Buti points out that “it has taken much longer to reach this milestone than in other advanced economies”. And it has reached that milestone just as the risk that the global economy may blow out again reaches its highest point since the onset of the great recession.