Brussels warns eurozone economy faces ‘host of negative risks’

Brussels warns eurozone economy faces ‘host of negative risks’

The European Commission has warned that the bloc’s economy faces a “host of negative risks” in the second half of the year, even as it kept its growth projections for 2019 unchanged.

Pierre Moscovici, the EU’s economy commissioner, said that surprisingly strong euro area growth in the first quarter of 2019 “will be entirely offset by a weakening during the rest of the year”, as a recovery in German auto sales fizzles out and one-off factors cease to apply.

The good performance in early 2019 was driven in part by stockpiling in the UK ahead of the original March 29 Brexit deadline and by the mild winter, said Mr Moscovici, as he presented the commission’s summer economic forecasts.

Brussels expects growth of 1.2 per cent in the eurozone this year, and 1.4 per cent in the wider EU. Both those projections are sharply lower than the 2018 growth rate, but are unchanged from the commission’s spring forecasts, which were issued in May.

The euro area is now expected to grow by 1.4 per cent next year, slightly slower than previously forecast. The commission lowered its eurozone inflation forecast for this year and next year to 1.3 per cent, from 1.4 per cent previously.

The relative stability of the numbers “masks an important reassessment in near-term growth prospects” and a “downgrade” in economic momentum, particularly in the manufacturing sector, Brussels warned.

It also stressed that the outlook is at risk from a host of global factors including a worsening of US-China trade friction, a no-deal Brexit and rising tension in the Middle East.

These threats “appear even more interconnected than before at this fragile juncture in the global economy”, the commission said. “Any further escalation of trade tensions and an increase in policy uncertainty could prolong the current downturn.”

The forecasts highlighted the threat to the euro area and wider EU of a further worsening of the international trading environment as US President Donald Trump targets China and other major economies with punitive tariffs.

Mr Moscovici noted that Germany, the euro area’s largest economy, was “particularly exposed” because of its reliance on exports of cars and other industrial goods. He said the country was “unlikely to sustain” the strong growth it experienced in the first quarter of 2019, which was driven by increased automotive sales and a front-loading of deliveries to the UK.

Given the sluggish performance of Germany and Italy, Brussels said that economic activity over the coming quarters would depend on continued strong performance by central and eastern European countries, as well as on the resilience of the EU’s services sector and labour market.

“The labour market remains the bright spot in the euro area outlook,” Brussels said. “But here too the outlook is increasingly challenged by the protracted weakness in manufacturing and external demand.”

Growth in 2020 would nevertheless be helped by a higher number of working days, the commission said. “Given the numerous risks to the outlook, we must certainly intensify our efforts to strengthen the resilience of our economies,” Mr Moscovici said. “Euro area reforms are more necessary than ever.”

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