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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Spring Forecast: A continuing recovery
Press Room, Brussels
Brussels, 5 may 2014
Welcome to this presentation of our 2014 Spring forecast.
The main messages of the Spring Forecast are the following:
First, since the EU economy came out of recession a year ago, the economic outlook for the EU remains favourable. The recovery in is gaining traction, including in the vulnerable countries. The policies implemented in recent years are bearing fruit. Investment is rebounding. While unemployment remains high in many Member States, the labour market has stabilised and we expect some improvement in the next two years.
Second, since 2012 financial market conditions have been improving, particularly in equity and bond markets. Vulnerabilities regarding fiscal and current account deficits have significantly declined. The fragmentation in lending markets should diminish, leading to improved lending conditions for small and medium-size companies.
Third, inflation is projected to remain at a low level for a prolonged period, as price pressures remain subdued.
After accelerating markedly in the second half of 2013, global trade has been in a softer patch recently. But looking ahead, global GDP growth is set to strengthen gradually, led by the advanced economies.
Emerging market economies will fare quite unevenly. China is stabilising at more sustainable growth rates. Recent financial tensions have so far mostly affected emerging markets that have less solid macroeconomic fundamentals. For example, the outlook for Russia is for a further slowdown this year. Moreover, this is subject to downside risks related to the geopolitical situation concerning Ukraine.
Global trade is projected to pick up as well and to accelerate faster than in 2013. Moreover, world trade is expected to expand more rapidly than global output as trade-intensive sectors, such as investment spending, start playing a larger role. Total world import growth is set to accelerate to 4.4% in 2014 and 5.7% in 2015 (after 2.2% in 2013).
Economic sentiment as measured by DG ECFIN's Economic Sentiment Index has been on an upward trend since May of last year.
The long-term average has been exceeded for the EU, the euro area and for the group of vulnerable countries included here (Greece, Italy, Spain and Portugal).
While recently the dynamics have lessened somewhat, the picture is consistent with our GDP growth scenario.
The ongoing fiscal and economic adjustment, as well as the policies implemented at the national and EU levels, have underpinned the decline in sovereign bond yields.
Ireland and Spain exited successfully their financial assistance programmes at the turn of the year. Their exit spurred a series of successful bond issuances, naturally from Ireland and Spain, but also from Portugal and Greece.
Financial markets are forward-looking. In other words, the narrowing of government bond yields depends on the investor expectation that reform policies will continue. Let us not forget that it was doubts about the resolve to address fiscal and structural problems that lay at the beginning of the sovereign debt crisis.
Financial fragmentation persists across Europe, but it is receding. Europe is still recovering from the consequences of the pre-crisis credit boom. The economic recovery in the EU so far has been accompanied by falling bank lending. Lending conditions still vary significantly across countries and are difficult especially for SMEs.
However, the most recent ECB bank lending survey of last week confirmed the stabilisation of bank lending conditions, which you can see from the red lines in the usual graph.
The blue line shows that demand is picking up. Progress with the cleaning up of bank balance sheets is putting banks in a better position to extend credit as demand gets stronger. The rigorous asset quality review and stress tests this year are very important for the recovery.
Finally, let me mention the positive signs coming from Greece: The large amounts of private equity capital raised by Greek banks in recent weeks have exceeded market expectations and point to returning confidence.
Europe's economic recovery began a year ago and is expected to become broad-based across countries.
Real GDP growth this year is forecast at 1.6% in the EU and 1.2% in the euro area. In 2015, growth is expected to accelerate to 2.0% and 1.7% respectively.
Growth in Europe is increasingly based on stronger domestic demand.
Investment should increasingly benefit from improving sentiment and lower uncertainty, continued benign funding conditions, and an improved outlook for demand. At the same time, differences between countries in private debt and consolidation needs continue to matter.
In view of the stabilisation and subsequent improvement in the employment situation, private consumption is expected to gain momentum over the next two years. Real disposable incomes should benefit from low consumer price inflation.
In the EU, general government deficits are set to decline further. In 2014, a decline is projected to around 2½% of GDP in EU, whereas debt-to-GDP still amounts to about 90% of GDP in the EU before falling next year.
Consumer price inflation has decreased substantially in recent months. This was partly due to external factors and partly due to domestic ones.
Price pressures are expected to remain subdued, as we expect energy prices to continue to decline, and as demand is only gradually firming and unemployment is still high. At the same time, the very low inflation rates that are currently observed in some Member States reflect in part the on-going and necessary adjustment process of restoring competitiveness.
For the euro area as a whole, inflation showed some rebound in April from the reading in March, but it is expected to remain low for some time. For 2014, we expect consumer price inflation of 0.8% in the euro area and at 1.0% in the EU. For 2015, we expect it to increase to 1.2% in the euro area and 1.5% in the EU, as economic growth gains momentum.
Let me turn to the European growth map. Just to see where we are coming from today, this is the map of two years ago, 2012.
Today, the European growth map became greener. The recovery in Europe is expected to be broad-based across EU Member States as activity has also started to strengthen in the vulnerable countries. Growth differentials persist, but the gap is projected to narrow.
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, as the final programme review mission confirmed last week. In Greece, a moderate rebound is expected to begin this year.
Among the larger economies, a steady expansion driven by domestic demand is expected in Germany. The economy of The Netherlands has turned the corner, with growth set to be driven by investment this year and, in 2015, also by rising household consumption. In France, the recovery is slowly taking shape, driven mainly by domestic demand. The gradual recovery underway in Italy is set to be driven by exports. Strong growth is projected in the United Kingdom and in Poland on the back of increasingly robust domestic demand.
In the Nordic-Baltic region, we see strong growth in Latvia, Lithuania and Sweden, and a gradually accelerating recovery in Denmark, Estonia, Finland.
While the outlook for Slovenia has improved, we project an ongoing recession in Croatia, where we have identified a serious need for reforms. In Cyprus, the growth outlook will be updated by the programme review mission starting this week.
As you can see from the growth map for 2015, all EU economies are expected to be growing again by next year.
The recovery has now taken hold. Continued reform efforts by Member States and the EU itself are paying off. The Commission will assess the achievements and further reform needs in the country-specific recommendations on 2 June.
Ladies and Gentlemen,
The ongoing adjustment in the euro area today is very much a story of deep structural change. Sound foundations are in place for the economic recovery to continue. External developments may increase uncertainty, but our foundations remain intact.
This reminds me of the profound adjustment that took place in the central and eastern European economies, as we celebrate their joining the EU exactly 10 years ago. Let me illustrate this with a long-term growth picture.
This slide shows the development of the income per head of those economies that joined the EU in May 2004, relative to the income per head of the whole EU.
In 1994, their income per head amounted to less than half of the EU's. In 2004 this ratio had increased to 58%. Now, in 2014, the income per head of the 2004 wave of accession should reach 72% of the EU.
For the Member States from central and eastern Europe, this process began 25 years ago, when they began their firm course towards economic and political integration with the European Union. The EU has been the motivation and the anchor for deep structural reform and economic adjustment.
The process of transformation and integration has been long, it has not been without setbacks, and there is still way to go.
But it clearly shows that opportunities open up with a strong commitment to structural reforms, to entrepreneurial spirit, to social fairness, and to respect for the rule of law. And the success of the new Member States has opened up many opportunities for others too.
This lesson from 25 years of transformation should give all of us confidence in our own ability to continue on the path of economic reform for a sustainable recovery in growth and job creation.
This forecast provides the background for our economic surveillance. On the basis of this forecast, the Commission will evaluate Member States' commitments under the Stability and Growth Pact. The Commission will present its conclusions from this ongoing analysis on 2 June when we present the country-specific recommendations as part of the European Semester.
Thank you very much for your attention.