LONDON - The eurozone economy will grow this year at its fastest rate in a decade following a run of upbeat news largely linked to a reduction in uncertainty following a series of elections, the European Union said Thursday.
In updated forecasts, the EU's executive Commission said it expects growth this year of 2.2 per cent, which would be the highest rate for the 19-country bloc since 2007. In its previous forecast in the spring, it had penciled in growth of 1.7 per cent.
The Commission also raised its eurozone growth forecast for next year to 2.1 per cent from 1.8 per cent and said growth in 2019 is expected to be 1.9 per cent.
The upgrades take into account strong economic indicators from the eurozone as risks to the outlook, largely related to a series of elections in Europe this year, have dissipated. Though populist forces remain a major presence in a number of countries, such as in Austria, politicians from the mainstream broadly came out on top in elections in France, Germany and the Netherlands.
"After five years of moderate recovery, European growth has now accelerated," said Pierre Moscovici, the Commission's top economy official.
"We had several major elections; they are now behind us and political uncertainty .... has continued to decrease from the high levels experienced a year ago."
In its autumn forecast, the Commission said the risks to the outlook were "broadly balanced." That's the first time in years the risks are not "tilted to the downside," a clear sign that the debt crisis has abated, notably in Greece, where growth is expected to beat the eurozone average in 2018 and 2019 at 2.5 per cent in both years. Greece is set to exit its bailout era, which started in 2010, next summer.
Still, the Commission noted a series of risks such as elevated geopolitical tensions, the extension of protectionist trade policies, Britain's exit from the EU and the rise in the euro. Positive forces could emerge, however, from diminishing uncertainty and improving sentiment in Europe to stronger global growth.
It also cautioned that developments in the restive Spanish region of Catalonia could weigh on the country's growth but that the size of any impact cannot be gauged yet. Spain's economy is predicted to expand by an impressive 3.1 per cent this year, falling back to 2.5 per cent and 2.1 per cent over the next two years — even without any impact from Catalonia's independence movement, which has prompted Madrid to impose direct rule on the region and arrest many of its leaders.
"We cannot speculate on any political development anywhere," Moscovici said.
One particular area of concern cited by Moscovici related to subdued wage increases that are keeping inflation across the bloc below the European Central Bank's target of just below 2 per cent. That's why the ECB is persisting with stimulus measures and keeping interest rates at rock-bottom levels. He also said the eurozone needs to become "more resilient" to future shocks and turn itself into a "true motor of shared prosperity."
Moscovici cautioned that the recovery is low by historical standards and "atypical given its dependence on policy support, the continuing presence of fiscal and financial fragilities stemming from the crisis and the relatively subdued domestic demand compared to past recoveries."
The Commission also published a forecast for the wider 28-nation EU, which includes non-euro countries such as Britain. It said growth this year would likely be 2.3 per cent, up from 1.9 per cent, while next year's would be 2.1 per cent, also up from 1.9 per cent. For 2019, it expects growth of 1.9 per cent.
One laggard is Britain, where growth has come off the boil amid uncertainty over Brexit. The Commission forecast that growth in Britain in 2019 — the country is due to leave the bloc in March of that year — would only be 1.1 per cent but stressed that its forecast was just a "technical assumption of status quo" in terms of the future trading relationship between the country and the rest of the EU.
This, the Commission said, is for "forecasting purposes only and has no bearing on the talks underway" in the context of the Brexit talks, which resumed Thursday.