Download Euro area recovery still lacks momentum

Euro area recovery still lacks momentum
Jens Boysen-Hogrefe, Salomon Fiedler, Klaus-Jürgen Gern, Dominik Groll, Stefan Kooths und Ulrich Stolzenburg
Economic recovery in the Euro area continues at a moderate pace. Sentiment indicators pointed slightly
downwards in August, but remain on a fairly expansionary level. The recent cooldown may reflect a late response
to the Brexit vote, which we expect to weigh on economic activity in the Euro area only to a minor extent. In our
view, the main effect will materialize in the expansion rate of 2017, which might be dampened by a quarter
percentage point. Meanwhile, the labor market situation has kept improving and other indicators, particularly
those related to private consumption expenditure, imply further increases in economic activity. Supportive factors
such as low interest rates and a low external value of the currency are accompanied by a mildly expansionary
fiscal policy stance over the forecast horizon. Overall, economic activity is expected to maintain the current pace
of expansion over the coming two years.
 We expect GDP to expand by 1.6 percent in the current year and to maintain that speed of
expansion in the following years. In 2017 and 2018, GDP is expected to rise by 1.7 and 1.8 percent.
For the Euro area excluding Germany we
Bruttoinlandsprodukt im Euroraum 2014-2018
forecast a GDP growth rate of 1.5
percent (2016), 1.5 percent (2017) and
2010 = 100
Prozent
110
1.7 percent (2018).
 Irelands GDP growth rate in 2015 has
been revised upwards to 26.3 per cent.
The q-o-q growth rate in the first quarter
of 2015 alone is reported to be 21.4 per
cent. As a result, expansion rates for the
euro area as a whole were also revised
upwards despite Ireland’s rather modest
share in Euro area GDP. The revision was
necessary to take into account the scale
by which multinational enterprises
relocated assets to Ireland, which they
did in order to benefit from more
favorable tax conditions. Revenue for
these capital goods (royalties, usage
fees) as well as depreciations and
replacement investments are now
attributed to in Ireland’s economy (Box:
Zur Revision des Bruttoinlands-produkts
in Irland).
1,0
108
106
0,5
104
102
0,0
100
1,1
2,0
1,6
1,7
1,8
98
-0,5
I II III IV I II III IV I II III IV I II III IV I II III IV
2014
2015
2016
2017
2018
Quartalsdaten, preis-, kalender- und saisonbereinigt;
Veränderung gegenüber dem Vorquartal, Jahresrate (gerahmt).
 Headline inflation is expected to converge to its core rate by the end of the year. Provided that
energy prices remain fairly stable over the forecast horizon, their recent dampening effect will
vanish soon. For 2016 to 2018, we expect annual inflation rates of 0.2 percent, 1.2 percent and
1.4 percent, respectively.
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Euro area recovery still lacks momentum
 The situation on the labor markets is expected to improve further. The unemployment rate
continues to decline, from currently 10.1 percent (July) to an annual average of 8.8 percent in
2018.
 Fiscal consolidation has ended. The expected further reduction of budget deficits is mainly driven
by declining interest rate payments and the economic recovery rather than consolidation efforts.
Over the forecast horizon, fiscal policy is expected to be mildly expansionary on average.
 Targeting the Euro area fiscal stance by fiscal coordination could destabilize the Euro area on the
country level. In its current approach to achieve an appropriate Euro area fiscal stance, the EU
Commission asks countries with fiscal space to provide extra stimulus in order to compensate for
countries that are constrained by debt sustainability considerations. However, the aggregate
fiscal stance is not a particularly useful concept since it abstracts from too much relevant
information at the country level. In particular, excessive stimulus in one country is likely to
generate welfare losses there, since this may compromise fiscal sustainability and/or cause its
economy to overheat. Additional spending in one country can help other countries only if (1) there
are significant trade spillovers and (2) monetary policy does not respond to the increase in
economic activity. Even then, the composition of national fiscal policies may be inappropriate,
since additional spending would take place in countries where it is not needed. As a result,
following this policy approach might destabilize the Euro area on the disaggregated level (see Box:
“Zur Koordination finanzpolitischer Impulse” as well as Ademmer et al. (2016). Euro area fiscal
stance: Definition, implementation and democratic legitimacy. European Parliament Briefing
Paper <http://www.europarl.europa.eu/RegData/etudes/IDAN/2016/574425/IPOL_IDA(2016)574425_EN.pdf >).
Key Economic Data for the Euro Area, 2015–2018
2015
2016
2017
2018
Real GDPa
2.0
1.6
1.7
1.8
without Germanya
2.2
1.5
1.5
1.7
1.4
Consumer prices (HICP)b
Unemployment ratec
0.0
0.2
1.2
10.9
10.2
9.4
8.8
Budget balanced
-2.1
-1.9
-1.7
-1.5
aChange of price- and calendar adjusted GDP in percent. — bChange over previous year in percent. — cIn percent of labor
force. — dPercent of nominal GDP. — Shaded: IfW forecast.
Prof. Dr. Stefan Kooths
Phone: +49 (0) 30-2067-9664 (Office Berlin)
Phone: +49 (0) 431-8814-579 (Office Kiel)
[email protected]
Dr. Ulrich Stolzenburg
Phone.: +49 (0) 431-8814-605
[email protected]
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Euro area recovery still lacks momentum