All economies in Europe have expanded in 2017 and prospects remain favorable in the short term. This is the latest edition of the report “Regional Economic Perspectives: Europe”, published today by the International Monetary Fund (IMF). However, in order for growth to continue beyond its current acceleration, the European countries will have to weaken structural constraints on it, ranging from barriers to investment to competitiveness limits.
“Europe continues to enjoy strong growth, but recent indicators suggest that momentum is somewhat stabilized. Medium-term economic prospects are less bright, so politicians need to capture the moment and reduce their deficits and debt, and push reforms that will make their economies more productive”, said Poul Thomsen, director of the IMF Europe Division.
According to the report, the region’s economy grew by 2.8% in 2017, by 1 percentage point above the results for the previous year. The main driver was local demand, and credit growth is also rising.
The IMF points out that, although some of the leading indicators have recently experienced slight declines, they still remain at high levels. The forecast for Europe’s growth is 2.6% this year and 2.2% next year. However, it is noted that fiscal adjustments and efforts towards structural reforms still fail to achieve the desired results.
As far as inflation and wage growth are concerned, they remain moderate in developed economies and are likely to progress progressively due to a tight labor market. At the same time, however, in Central and Eastern Europe, where economies are ahead in their economic cycle, wage and inflation projections are expected to accelerate significantly in 2018, which may affect competitiveness.
The report also identifies several risks that could threaten the economy’s development in the medium term. The immediate risks stem from high global financial market assessments as well as from the rising trend towards protectionist policies. The European markets have managed to cope well with financial volatility recently and capital flows to emerging markets remain high. However, the authors note that large sustained declines in stock prices may often turn into a prerequisite for weak growth and inflation. Against the backdrop of interest rates around zero in many countries and unpopular central bank policies, the space for further relief in response to new shocks is not great. That is why, according to the IMF, it is important to create room for maneuver in fiscal policy.
An important recommendation of the report is capturing recovery as an opportunity to move faster towards deepening the EU’s Economic and Monetary Union. Action is needed to complete the banking union, but also central fiscal capacity, access to which depends on the implementation of fiscal rules with mechanisms to prevent permanent transfers between countries.
Last but not least, according to the Fund, urgent steps are needed to complete the capital markets union, given the EU’s exit from the UK. This requires promoting the harmonization of insolvency regimes and better protection of cross-border investor rights.
As for economic forecasts, the IMF confirms the already published in its global report of April this year. According to expectations, the Eurozone economy will grow by 2.4% and 2.0% respectively this year and next. The EU inflation will remain at 2.8% in 2018 and 2019, but in the Eurozone it will slightly accelerate next year to 1.6% from 1.5% this year.
Europe’s largest economy, Germany, will see growth of 2.5% this year, which will slow to 2.0% in the next year at 1.6% and 1.7%, respectively. For 2018 and 2019, France will record GDP growth of 2.1% and 2.0%, Italy – 1.5% and 1.1%, and Great Britain – 1.6% and 1.5%. The fastest growth within the Eurozone this year is expected to reach Ireland – 4.5%.