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Tuesday 24.10.2017 | Name days: Renāte, Modrīte, Mudrīte
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Economic forecast: stable economic growth on the horizon

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUEurope’s economy has started on its fifth recovery year. All EU member states currently experience recovery. It is expected that recovery will continue at a moderate rate this year and the next, as mentioned in the 2017 spring economic forecast.

The report mentions that Eurozone’s GDP growth will be 1.7% in 2017 and 1.8% in 2018. It is expected that GDP growth in the EU will remain the same in the next couple of years – 1.9%.

Vice-President of the European Commission Valdis Dombrovskis comments on this: «Today’s economic forecast shows that growth in the EU is gaining strength and unemployment is continuing to decline. Yet the picture is very different from Member State to Member State, with better performance recorded in the economies that have implemented more ambitious structural reforms. To redress the balance, we need decisive reforms across Europe from opening up our products and services markets to modernising labour market and welfare systems. In an era of demographic and technological change, our economies have to evolve too, offering more opportunities and a better standard of living for our population.»

Pierre Moscovici, who is responsible for economic and financial affairs, taxation and customs, adds: «Europe is entering its fifth consecutive year of growth, supported by accommodative monetary policies, robust business and consumer confidence and improving world trade. It is good news too that the high uncertainty that has characterised the past twelve months may be starting to ease. But the euro area recovery in jobs and investment remains uneven. Tackling the causes of this divergence is the key challenge we must address in the months and years to come.»

Global growth to increase even more

Global economic growth rate picked up late last year and this year following sped up growth in many developed and emerging countries. It is expected growth around the world (aside from the EU) will increase from 3.2% in 2016 to 3.7% this year and 3.9% the next, because China’s economic growth will remain stable and recovering commodity prices assist other emerging countries. The outlook for the US economy remains largely unchanged compared to the winter. In general, it is expected that the net exports will not have an impact on Eurozone’s GDP growth in 2017 and 2018.

Temporary rise of inflation

Inflation has grown considerably in recent months. This is mainly due to oil price increases, as concluded in the report. Nevertheless, core inflation, which does not include volatile energy and unprocessed food prices, remains relatively stable and below its long-term average. It is expected inflation in Eurozone to rise from 0.2% in 2016 to 1.6% in 2017 before declining again to 1.3% in 2018.

Private consumption to decline due to inflation; investment level to remain stable

Private consumption, the main force behind growth in recent years, expanded at its fastest pace in 10 years in 2016 but is set to moderate this year as inflation partly erodes gains in the purchasing power of households. As inflation is expected to ease next year, private consumption should pick up again slightly. Investment is expected to expand fairly steadily but remains hampered by the modest growth outlook and the need to continue deleveraging in some sectors. A number of factors support a gradual pick-up, such as rising capacity utilisation rates, corporate profitability and attractive financing conditions, also through the Investment Plan for Europe.

Unemployment level to decline

Unemployment continues its downward trend, but it remains high in many countries. In the euro area, it is expected to fall to 9.4% in 2017 and 8.9% in 2018, its lowest level since the start of 2009. This is thanks to rising domestic demand, structural reforms and other government policies in certain countries which encourage robust job creation. The trend in the EU as a whole is expected to be similar, with unemployment forecast to fall to 8.0% in 2017 and 7.7% in 2018, the lowest since late 2008.

The state of public finances improves

Both the general government deficit-to-GDP ratio and the gross debt-to-GDP ratio are expected to fall in 2017 and 2018, in both the euro area and the EU. Lower interest payments and public sector wage moderation should ensure that deficits continue to decline, albeit at a slower pace than in recent years. In the euro area, the government deficit to-GDP ratio is forecast to decline from 1.5% of GDP in 2016 to 1.4% in 2017 and 1.3% in 2018, while in the EU the ratio is expected to fall from 1.7% in 2016 to 1.6% in 2017 and 1.5% in 2018. The debt-to-GDP ratio of the euro area is forecast to fall from 91.3% in 2016 to 90.3% in 2017 and 89.0% in 2018, while the ratio in the EU as a whole is forecast to fall from 85.1% in 2016 to 84.8% in 2017 and 83.6% in 2018.

Risks to the forecast are more balanced but still point down

The uncertainty surrounding the economic outlook remains elevated. Overall, risks have become more balanced than in the winter but they remain tilted to the downside. External risks are linked, for instance, to future US economic and trade policy and broader geopolitical tensions. China’s economic adjustment, the health of the banking sector in Europe and the upcoming negotiations with the UK on the country’s exit from the EU are also considered as possible downside risks in the forecast.

Context

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 25 April 2017. Interest rate and commodity price assumptions reflect market expectations derived from derivatives markets at the time of the forecast. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 25 April 2017. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.

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