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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Speaking points by Vice-President Rehn at the press conference on the Winter Economic Forecasts
European Parliament, Strasbourg
Strasbourg, 25February 2014
Welcome to this presentation of our winter forecasts, vintage 2014 taking place exceptionally in Strasbourg
The main messages of the forecast are the following:
First, recovery in the European Union is gaining ground and spreading across countries, although it remains still modest. It is good news that economic activity has also started to strengthen in the vulnerable countries. The differences in growth rates between countries are projected to narrow in this period of 2014-2015. However, unemployment remains high in many Member States, as we know, although we expect some improvement in the course of this year and next year.
Second, since 2012 financial market conditions have been improving, particularly in equity and bond markets. Looking ahead, the persistent fragmentation of lending markets is projected to diminish, which should help to improve lending conditions for small and medium-size enterprises, which are the backbone of employment in Europe.
Third, we project inflation will remain at a low level both this year and next, as price pressures remain subdued. I will return to this before concluding.
Concerning the external environment, overall, economic activity outside the EU is expected to accelerate to about 4 % this year and 4,5% in 2015.
At last weekend´s G20 Ministerial meeting in Sydney, we discussed the global economic situation with a view to reinforcing global growth through significant economic reforms and effective coordination.
The recovery in the EU will be supported externally by advanced economies, most notably the US, while the emerging market economies will fare quite unevenly. China is stabilising at more sustainable growth rates, while there are continued signs of weakness in Russia and Brazil. Recent financial tensions have so far mostly affected emerging markets that have less solid macroeconomic fundamentals, such as Argentina, South Africa and Turkey.
Global trade is expected to rise faster than GDP, with world import growth doubling from 2½% to about 5% between 2013 and 2014 and rising to 6% in 2015, which is reflecting both the reinforcement of the global recovery and the impetus from trade-intensive sectors.
In recent months, sentiment indicators have increased further. Continuing along its upward trend since May 2013, the Commission’s Economic Sentiment Indicator passed its long-term average in September in the EU and in December in the euro area. In January 2014, sentiment kept increasing while the pace of improvement slightly moderated, which in fact, should remind us that we cannot afford to lessen our reform efforts.
In this regard, it is encouraging that in the so-called vulnerable Member States (Greece, Portugal, Spain and Italy are shown here), confidence has also been rising.
Confidence has also been strengthening thus reinforcing the economic turnaround. Bond spreads of vulnerable Member States are continuing to narrow, thanks to investor confidence in the success of the fiscal adjustment and economic reform process.
The successful completion of the financial assistance programmes of Ireland and Spain has further reinforced confidence and spurred a wave of sovereign issuances.
We have also seen a significant improvement in the economic conditions of Portugal. These are not yet fully reflected in our forecast, which is as we speak, just being updated during the ongoing eleventh programme review. Portugal has successfully tapped the markets this year and will conclude the programme in May.
On credit condition, an important issue for growth, despite some normalisation in bank funding conditions, financial fragmentation on the euro area lending market continues to impair the transmission of monetary policy, affecting mainly small and medium-size companies. In the vulnerable countries, bank lending rates have receded somewhat from high levels, but there is still scope for further improvement.
Looking forward, the ECB's comprehensive assessment of euro area banks' balance sheets should contribute to improving the credit flow to viable companies. Moreover, a smooth and effective implementation of the Banking Union should further reinforce confidence in European banks.
Let me turn to GDP Growth, Europe's economic recovery, which began in the second quarter of last year, is expected to become broad-based across countries and to gain strength while at the same time becoming more balanced. As it is typical following deep financial crises, like we have experienced in recent years, the recovery remains modest and still fragile.
Nevertheless, thanks to recent positive economic news, the forecast for GDP growth this year and next have been raised slightly since the autumn. EU GDP is now expected to grow by 1.5% this year and by 2.0% next year. GDP in the euro area is projected to be 1.2% this year and 1.8% in 2015.
There is more in this than just the figures. It´s good news that growth is increasingly based on stronger domestic demand, as the burden of excessive debt and financial fragmentation is gradually fading, and confidence is improving.
Concerning other components, investment growth is projected to significantly strengthen, as the main impediments to firms' demand are slowly receding.
Following the stabilisation and subsequent improvement in the employment situation, private consumption is expected to gain momentum in the course of these two years. Real disposable incomes should benefit from low consumer price inflation. Thanks to improved confidence, there is less need for so-called precautionary savings, which means that households are expected to spend most of the increase in real incomes.
Before you ask, I will focus on inflation as it is on the minds of many of you, and rightly so. Consumer price inflation decreased substantially over the course of 2013, particularly in the last quarter of the year 2013. This was partly due to external factors like lower energy and commodity prices and partly due to domestic ones related to maybe somewhat wage pressures.
Price pressures are expected to remain subdued, as we expect energy prices to continue to decline, and as demand is only gradually firming and unfortunately unemployment still high.
Consumer price inflation is now expected at 1.2% in the EU in its entirety and 1.0% in the euro area in 2014. A slight increase is projected for 2015 when economic growth gains momentum.
What does this imply? On the one hand, low inflation supports private consumption because it boosts real disposable incomes. On the other hand, a prolonged period of very low inflation for the euro area as a whole could make the ongoing rebalancing of the European economy more challenging.
Why so? First, it is only natural and in fact intended that inflation is low in the reforming vulnerable countries seeking to regain cost and price competitiveness, but prolonged low inflation in the whole euro area would make it harder for them to achieve these objectives. Moreover, since inflation expectations have been sagging, real interest rates have actually risen since the autumn, which can affect debt dynamics. Of course, high debt levels must in any case be addressed first and foremost through responsible fiscal policies and growth-enhancing structural reforms.
Prolonged low inflation could not be an excuse for not reforming, but it would make the rebalancing undoubtedly harder.
Let me conclude with the European growth map ̶ first for 2014.
The recovery in Europe is expected to be broad-based as I said, across EU Member States as economic activity has also started to strengthen in the vulnerable countries.
Internal and external adjustment in vulnerable Member States is progressing, underpinned in many cases by significant structural reforms that are starting to bear fruit. Ireland is seeing increasingly robust employment growth. The economic recovery is firming in Spain and Portugal, and a moderate rebound is expected to start this year in Greece. Greece has reached current account surplus for the first times since 1948.
Among the bigger economies, a steady expansion driven by domestic demand is expected in Germany. In France economic growth is only slowly recovering, supported by a timid pick up in private consumption. Rather mild economic recoveries in the Netherlands and in Italy are set to be driven by net exports and investment. Strong growth is foreseen in the United Kingdom and in Poland on the back of increasingly robust domestic demand. This year, 2014, only Cyprus and Slovenia are still expected to register negative annual growth rates.
As you can see from the growth map for 2015, which looks greener than for this year, all EU economies are expected to be growing again by next year.
All in all, the worst of the crisis may be behind us, but this is not an invitation to be complacent. Our forecast assumes the continued implementation of agreed policy measures both at European level and Member State level in order to advance the necessary economic adjustment in Europe and in the Member States. To make the recovery stronger and create more jobs, we need to stay the course of economic reform. This message was clearly underlined by the G20 and our partners in the G20 last weekend in Sydney.
We will take a closer look into the remaining areas for structural reform to address macro-economic imbalances next week in Brussels. On Wednesday, 5 March the Commission will adopt its conclusions from the in-depth reviews that were launched for 16 countries under the Macro-economic imbalances procedure last autumn, and this concerns both the deficit – or now mostly former deficit – countries that have been restoring their economic competitiveness, and the surplus countries that face the challenge of strengthening domestic demand and investment.
We will for instance present these in-depth-review for countries like Italy and France, as well as for Germany.
I look forward to seeing you then.