The European Commission has downgraded its outlook for the pace of economic expansion in the Eurozone next year, saying that US efforts to overhaul the global trade order poses the greatest risk to the economy.
Adjustments of economic forecasts in the EU can lead to appropriate easing in terms of fiscal discipline, i.e., an increase in government spending, tax cuts or an increase in government debt.
The ministry also lowered its inflation forecast, saying that in 2020, growth of the price level will lag slightly behind the ECB’s target of 2%. The GDP growth rate is expected to slow sharply from 1.9% in 2018 to 1.2% in 2019 (unchanged compared with the estimate in the first quarter report). However, the negative trend in economic development was underscored by the updated growth forecast for 2020, which was revised from 1.5% to 1.4%.
Risks to the economy of the bloc have increased, said the commission, and mainly stem from heightened uncertainty around US trade policy, as Washington continues to threaten tariffs on a range of European goods.
A weak economic outlook contributed to lower inflation expectations from 1.4% to 1.3% in 2019 and 2020. The forecast of inflation expectations for 2019 coincides with the estimate of the ECB but is different for 2020. The Central Bank is a little more optimistic here, expecting a rise in the indicator to 1.4%. A significant backlog of 2% is very likely to force the ECB to begin a new round of rate cuts in September.
The commission confirmed that economies of Germany and Italy became the greatest reasons of disappointment. The growth of the German economy slowed down from 1.4% in 2018 to 0.5% in 2019 and could potentially return to 1.4% in 2020. This, however, is worse than the previous forecast of 1.5%. Italy is likely to demonstrate the slowest growth in the block with just 0.7%.