The European Commission on Thursday (9 November) gave an optimistic view of the EU economy, saying that it is "on track to grow at its fastest pace in a decade this year".
With the growth forecast for 2017 slashed by 0.3 percent, it also expects the United Kingdom economy to only grow marginally over the next two years - by 1.3 percent in 2018 and by 1.1 percent in 2019, the year Brexit is now scheduled to happen.
The outlook was positive for Spain despite the crisis over Catalonia, with its growth foreacast upgraded to a robust 3.1 percent for this year, leading the eurozone's major economies.
However, Pierre Moscovici, the commissioner for economic and financial affairs, warned that while both the eurozone and the wider European Union are expected to grow in 2018 and 2019, "challenges remain in the form of high debt levels and subdued wage increases". The lowest growth will be recorded by Italy and the United Kingdom with only 1.5 percent. It is gloomier about the outlook than the Bank of England, which expects growth of 1.7% in both years.
Moreover, in spite of more social spending due this year's budgetary measures, such as an increase in pensions, current expenditure growth is expected to weaken in 2018. The unemployment rate is projected to fall to 6.4% in 2017 and to gradually reach 5.7% in 2019.The Commission's assessment of the general government budget coincides with the fiscal policy objectives set out in the three-year budgetary projections 2018-2020, namely: a balanced budget in 2017 and 2018 and a surplus in 2019.
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"While market reactions to recent events in Catalonia have remained contained, the risk exists that future developments could have an impact on economic growth", the Commission noted in its reports, adding that the size of the impact "cannot be anticipated at this stage".
Despite the upbeat projections, the European Union said it still faces labor, wage and inflationary pressures that are compounded by risks posed by the U.K.'s exit from the bloc and President Donald Trump's protectionist economic policies.
"Investment is also picking up amid favourable financing conditions and considerably brightened economic sentiment as uncertainty has faded". The economies of all Member States are expanding and their labour markets improving, but wages are rising only slowly. "The period of unpredictability could be extended if some creditors decide to oppose the outcome of the settlement, which should be reached by mid-2018", said the Commission.
The Commission expects a gradual rebound of investment from the second half of the year. High households' indebtedness and increasing debt burdens, could also affect consumption growth.
"Based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the United Kingdom, growth is still expected to remain subdued over the forecast horizon".