European Economic Forecast Autumn 2016

208 Pages·2016·2.38 MB·English

ISSN 2443-8014 (online)
European
Economic
Forecast
Autumn 2016
INSTITUTIONAL PAPER 038 | NOVEMBER 2016
EUROPEAN ECON O M Y
Economic and
Financial Affairs
European Economy Institutional Papers are important reports analysing the economic
situation and economic developments prepared by the European Commission's Directorate-General
for Economic and Financial Affairs, which serve to underpin economic policy-making by the
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Luxembourg: Publications Office of the European Union, 2016

KC-BC-16-038-EN-N (online) KC-BC-16-038-EN-C (print)
ISBN 978-92-79-54351-7 (online) ISBN 978-92-79-54350-0 (print)
doi:10.2765/074080 (online) doi:10.2765/016220 (print)

© European Union, 2016
Reproduction is authorised provided the source is acknowledged.
European Commission
Directorate-General for Economic and Financial Affairs

European Economic Forecast
Autumn 2016

EUROPEAN ECONOMY Institutional Paper 038
ABBREVIATIONS
Countries and regions
EU European Union
EA euro area
BE Belgium
BG Bulgaria
CZ Czech Republic
DK Denmark
DE Germany
EE Estonia
IE Ireland
EL Greece
ES Spain
FR France
HR Croatia
IT Italy
CY Cyprus
LV Latvia
LT Lithuania
LU Luxembourg
HU Hungary
MT Malta
NL The Netherlands
AT Austria
PL Poland
PT Portugal
RO Romania
SI Slovenia
SK Slovakia
FI Finland
SE Sweden
UK United Kingdom
JP Japan
US United States of America

CIS Commonwealth of Independent States
EFTA European Free Trade Association
MENA Middle East and Northern Africa
ROW Rest of the World

Economic variables and institutions
CCCI Composite Credit Cost Indicators
CPI Consumer price index
EDP Excessive Deficit Procedure
EONIA Euro Overnight Index Average
ESA European System of National and Regional Accounts
ESI Economic Sentiment Indicator
GDP Gross Domestic Product
GNI Gross National Income
HICP Harmonised Index of Consumer Prices
NAWRU Non-Accelerating Wage Rate of Unemployment
NPL Non-performing loan
PMI Purchasing Managers' Index

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TLTRO Targeted Long-Term Refinancing Operations
VAT Value-Added Tax

ECB European Central Bank
Fed Federal Reserve, US
IMF International Monetary Fund
NBB National Bank of Belgium
OECD Organisation for Economic Cooperation and Development
OPEC Organisation of the Petroleum Exporting Countries
Other abbreviations
APP Asset Purchase Programme
CETA Comprehensive Economic and Trade Agreement
CSPP Corporate Sector Purchase Programme
FDI Foreign Direct Investment
NFC Non-Financial Corporations
SAFE Survey on the Access to Finance of Enterprises
SME Small and medium-sized enterprises
TPP Trans-Pacific Partnership
TTIP Transatlantic Trade and Investment Partnership
Graphs/Tables/Units
bbl Barrel
bn Billion
bp. /bps. Basis point / points
H Half
lhs Left hand scale
mn Million
pp. / pps. Percentage point / points
pt. / pts. Point / points
Q Quarter
q-o-q% Quarter-on-quarter percentage change
rhs Right hand scale
tn Trillion
y-o-y% Year-on-year percentage change

Currencies
EUR Euro
ECU European currency unit
BGN Bulgarian lev
CNY Chinese yuan, Renminbi
CZK Czech koruna
DKK Danish krone
GBP Pound sterling
HUF Hungarian forint
HRK Croatian kuna
ISK Icelandic krona
MKD Macedonian denar
NOK Norwegian krone
PLN Polish zloty
RON New Romanian leu
RSD Serbian dinar
SEK Swedish krona
CHF Swiss franc

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JPY Japanese yen
RMB Renmimbi
TRY Turkish lira
USD US dollar

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CONTENTS
Overview 1
PART I: EA and EU outlook 7
Modest growth in challenging times 9
1. Putting the forecast into perspective: The ‘new backlash against
globalisation’ and the euro area outlook 10
2. External environment 15
3. Financial markets 21
4. GDP and its components 24
5. The current account 36
6. The labour market 38
7. Inflation 43
8. Public finances 47
9. Macroeconomic policies in the euro area 49
10. Risks 52
PART II: Prospects by individual economy 69
Member States 71
1. Belgium: Modest growth, strengthening labour market 72
2. Bulgaria: Strong growth ahead 74
3. The Czech Republic: Growth expected to gather speed but
downside risks dominate 76
4. Denmark: The moderate recovery continues 78
5. Germany: Growth momentum maintained 80
6. Estonia: Growth slips this year but should pick up with external
demand 82
7. Ireland: Sustained growth amidst heightened risks 84
8. Greece: Recovery backed by domestic demand and exports 86
9. Spain: Growth expected to decelerate but remain robust 88
10. France: A prolonged period of moderate growth 90
11. Croatia: Towards a broad-based recovery 92
12. Italy: Economic recovery to continue at a modest pace 94
13. Cyprus: Resilient domestic demand leads the recovery 96
14. Latvia: Growth drops below expectations but outlook remains
favourable 98
15. Lithuania: Growth approaches a plateau 100
16. Luxembourg: Rising domestic demand drives growth 102
17. Hungary: Private consumption to drive growth 104
18. Malta: Soft landing after growth peaking in 2015 106
19. The Netherlands: Steady expansion set to continue 108
20. Austria: Private consumption driving growth as income tax reform
unfolds 110
21. Poland: Robust growth amid expansionary fiscal policy 112
22. Portugal: A modest recovery hampered by weak investment 114
23. Romania: Loosening fiscal stance boosts growth to a post-crisis
peak 116
24. Slovenia: Solid, broad-based growth ahead 118

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25. Slovakia: Robust growth to ensure steady labour market
improvement 120
26. Finland: Investment-led growth in 2017 with exports picking up in
2018 122
27. Sweden: Growth decreases but remains robust 124
28. The United Kingdom: Growth to moderate and inflation to rise 126
Candidate Countries 129
29. The former Yugoslav Republic of Macedonia: A rebound in
investment expected after the December elections 130
30. Montenegro: Large public spending results in fiscal strain 132
31. Serbia: Growth is firming up supported by rising consumption 134
32. Turkey: Economic slowdown amidst conflicts and turmoil 136
33. Albania: A gradual but steady recovery 138
Other non-EU Countries 141
34. The United States of America: Expansion moderates amid
increasing risks 142
35. Japan: Stimulus-driven growth in the near term 144
36. China: Steady headline growth, but underlying risks are rising 146
37. EFTA: Improving domestic demand as external vulnerabilities
remain 148
38. Russian Federation: A gradual upturn in activity but numerous
uncertainties remain 151
Statistical Annex 155

LIST OF TABLES
1. Overview - the autumn 2016 forecast 1
I.1. Attitudes towards trade and FDI 11
I.2. International environment 16
I.3. Composition of growth - Euro area 25
I.4. Composition of growth - EU 26
I.5. Labour market outlook - euro area and EU 39
I.6. Inflation outlook - euro area and EU 44
I.7. General Government budgetary position - euro area and EU 48
I.8. Euro-area debt dynamics 50

LIST OF GRAPHS
I.1. Real GDP, euro area 9
I.2. HICP, euro area 9
I.3. World trade and cross-border capital flows 11
I.4. Gini coefficients on income before and after taxes and
transfers, selected countries 12
I.5. Median household real disposable income G7 countries,
2009 = 100 13
I.6. Uncertainty indicators 14
I.7. Global GDP and global Composite PMI 15

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I.8. Global growth and its regional composition, non-EU GDP
growth 16
I.9. Sources of change in global non-EU GDP growth 17
I.10. Merchandise import volume (3-month moving average) 18
I.11. Non-EU import growth (goods volume) and elasticity of non-
EU imports with respect to non-EU GDP growth 19
I.12. Brent oil spot prices, USD and euro 20
I.13. 10-year maturity sovereign bond rates, selected countries 21
I.14. 5-year maturity corporate bond spreads, euro area 22
I.15. Net changes in credit standards and credit demand for
loans to non-financial corporations, euro area 23
I.16. Bank lending vs market funding, NFCs (yearly net flows in %
of 2015 GDP, Sept. 2015 to Aug. 2016) 23
I.17. Cost of corporate funding, euro area 24
I.18. Real GDP during the recession and recovery phases (2008-
2018), euro area 24
I.19. Real GDP growth and its components (half year-on-half
year), euro area (without Ireland) 25
I.20. Disagreement among forecasters about the outlook for
2017, euro area and UK 27
I.21. Economic Sentiment Indicator and PMI Composite Output
Index, EU 28
I.22. Real GDP growth and its components, euro area 29
I.23. Real GDP, EU 29
I.24. Real GDP growth during recession and recovery (2008-2018),
Member States and euro area 30
I.25. Real GDP growth in euro area Member States, 2010-2013
and 2013-2016 30
I.26. Recovery of real GDP (2008-2018), euro area and Member
States (without Ireland) 30
I.27. Private consumption (2008-2018), euro area 30
I.28. Retail trade volumes during the recession and recovery
phases (2008-2016), euro area 31
I.29. Retail trade volumes and retail confidence, euro area 32
I.30. Government consumption (2008-2018), euro area 32
I.31. Investment (2008-2018), euro area 33
I.32. Construction investment (2008-2018), euro area 34
I.33. Exports of goods, EU 35
I.34. Global demand, euro-area exports and new export orders 36
I.35. Current account, euro area, contributions by Member States 36
I.36. Oil and non-oil balance for Extra-EU trade 37
I.37. Decomposition of the change in the current account
balance relative to GDP, euro area 38
I.38. Current-account balances, euro area and Member States 38
I.39. Unemployment rate (2008-2018), euro area 38
I.40. Employment growth (2008-2018), euro area 39
I.41. Working hours per employed person (2008-Q1 - 2016-Q2),
euro area 39
I.42. Part-time employment, euro area 40
I.43. Beveridge curve, euro area and EU 41
I.44. Employment expectations, DG ECFIN surveys, euro area 41
I.45. Unemployment rate changes (2008-2018), Member States
and euro area 42

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I.46. Unemployment rate changes (2008-2016, 2008-2018), euro
area and Member States 42
I.47. Inflation breakdown, euro area 43
I.48. Oil prices, industrial producer prices in euro area and China 44
I.49. Wage growth and services inflation, euro area 45
I.50. Inflation expectations derived from implied forward inflation-
linked swap rates 46
I.51. Budgetary developments, euro area 47
I.52. Breakdown of the change in the aggregate general
government deficit, euro area 47
I.53. General government revenue and expenditure, euro area 48
I.54. Euro area interest rates 49
I.55. Euro area shadow rate (EA K-ANMS(2) Fixed LB) 50
I.56. Composite credit cost indicators, euro area 51
I.57. Development of the change in the structural balance and
the discretionary fiscal effort, euro area 51
I.58. Change in the structural balance vs output gap, 2017 51
I.59. Change in the structural balance vs government debt, 2017 51
I.60. Real long term interest rates and discretionary fiscal effort,
euro area 52
I.61. Euro area GDP forecast - Uncertainty linked to the balance
of risks 53

LIST OF BOXES
I.1. Main drivers of growth in 2017 - shock decomposition from
an estimated model 54
I.2. The shape of the euro-area banking sector and implications
for the economic outlook 57
I.3. What survey data tell us about Inequality 60
I.4. How is the recovery proceeding in the euro area? 63
I.5. The treatment of the impact of the UK’s leave vote in the
current forecast 66
I.6. Some technical elements behind the forecast 67

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