European Commission sharply cuts eurozone growth forecasts with Italy weakest

Renewed concerns on debt sustainability, mostly in Italy, were cited as among causes for the EU-wide slowdown

A Banca Carige bank branch in Rome, Italy. Growth for the country will almost stagnate, EU says. Bloomberg

The European Commission slashed its growth forecasts for all of the euro region’s major economies, from Germany to Italy, and warned that Brexit and the slowdown in China threaten to make the outlook worse.

The European Union’s executive arm delivered a downbeat report on Thursday that shaved a whole percentage point off its 2019 projection for Italy, now seen with minimal expansion of 0.2 per cent for the whole year compared with its previous forecast of 1.2 per cent. It is expected to be the slowest economy in the entire EU.

The lowered outlook comes two months after Rome and Brussels reached a compromise over Italy’s deficit target and will likely make it more difficult for the populist coalition to carry out its expansive spending plans. Renewed concerns on debt sustainability, mostly in Italy, were also cited as a cause for the EU-wide slowdown as Rome passed a free-spending budget forecast to have limited effects on growth, Reuters reported.

The gloomier forecast reflects more pronounced weakness in the region, which stumbled at the end of 2018 as political instability continued to rock Italy, violent protests in France depressed output, and Germany’s car industry struggled to rebound from changes in regulation, according to Bloomberg. Global trade uncertainty and a sharper-than-expected slowdown in China also pose external risks to the economic outlook.

In its forecasts, the commission sees the 19-nation eurozone economy expanding 1.3 per cent this year, down from 1.9 per cent projected in November. Growth in the 27-nation EU – without Britain that is planning to leave in March – is expected to slow to 1.5 per cent this year from 2.1 per cent in 2018.

The Bank of England cut its growth forecast for the UK economy on Thursday, saying that damage from Brexit had increased. The central bank slashed its 2019 expansion projection to 1.2 per cent from 1.7 per cent previously.

According to the EC, next year the eurozone is forecast to expand by 1.8 per cent.

In Germany, the bloc's largest economy, growth is expected to slow to 1.1 per cent this year from 1.5 per cent in 2018. The commission had previously forecast 1.8 per cent growth for Germany this year.

"Much of the euro area’s loss of growth momentum can be attributed to fading support from the external environment, including slower global trade growth and high uncertainty regarding trade policies," the commission said. "However, there have also been a number of domestic factors at play," it said, pointing to social tensions and budget-policy uncertainty in some countries, as well as weakness in the car industry.

Clouds on the horizon are also getting darker, the commission said. “In the US, the risk of an abrupt fiscal tightening appears to have increased, especially for 2020,” according to the report. “The Chinese economy might be slowing more sharply than anticipated while many emerging markets are still vulnerable to sudden changes in global risk sentiment.”

For the EU, Brexit remains a source of uncertainty, the commission said.

An increasingly anaemic economy will test the resolve of the European Central Bank to stick to its plans to gradually pare back its crisis-era stimulus. ECB policymakers already walked a fine line in December by downgrading economic forecasts at the same time as ending net asset purchases that have helped buoy eurozone demand.

On inflation, the commission cut its 2019 eurozone forecast to 1.4 per cent, down from 1.8 per cent in earlier projections. The ECB aims to get inflation to just below 2 per cent over the medium term.