(Bloomberg) -- The European economy is poised to see another year of strong growth, but clouds are gathering over what was once a sunny horizon.
Inflated asset prices, trade protectionism, a looming monetary policy tightening, uncertainty in Greece and Italy, and continuing weakness in the U.K. mean that risks “have sharply increased,” the European Commission said in its quarterly economic report published on Thursday.
Here’s a quick look at the main signs of trouble ahead:
Gloomy U.K. Outlook
The commission maintained its gloomy outlook for the U.K. economy, projecting “weak” business investment, “subdued” private consumption, and household savings stabilizing “around historic lows.” While growth last year was higher than the commission staff had projected, this was mostly due to the carryover effect of 2016, according to the forecasters. The economy is now seen growing 1.5 percent this year, and slowing to 1.2 percent in 2019.
While the figures are slightly better than the previous forecast published in February, the U.K. is still tied with Italy as Europe’s growth laggard. On the bright side, inflation will cool to below the Bank of England’s target by next year despite tight conditions in the labor market, “as the impact of sterling’s earlier depreciation on consumer prices unwinds.”
U.S. Overheating, Trade
The commission reiterated that the biggest risks to global growth stem from the U.S. and the policies of Donald Trump’s administration, which it said “present a dangerous nexus.” The EU’s executive arm reiterated its warnings that the fiscal stimulus injected by Trump’s tax cuts may lead to an overheating of the American economy and trigger faster Federal Reserve tightening.
Due to its openness, the European economy would be vulnerable to any further deterioration of trade conditions, the commission said. “Overall, trade disputes could blow the current expansion off course” was the commission’s summary of the situation.
Growth in the debt-ridden state was cut to 1.9 percent for 2018 and 2.3 percent in 2019 - from 2.5 percent projected for both years in February. This isn’t great news for Athens, which has been trying to convince markets it can stand on its own feet as it seeks to exit its bailout in three months. The commission said that weak consumption suggests households are more financially stretched than anticipated and improvements in employment are taking longer to be translated into higher consumption.
While the commission kept its growth forecast unchanged for Italy, it cautioned that risks to its outlook have become more tilted to the downside. “Policy uncertainty has become more pronounced and, if prolonged, could make markets more volatile and affect economic sentiment and risk premia,” it said. The warning comes amid Rome’s impasse after a general election two months ago produced a hung parliament and amid a growing risk that another vote will be needed. That would prolong the economic and political uncertainty.
Good news on growth for Spain, with the European Commission raising its forecasts for 2018 and 2019 -- to 2.9 percent and 2.4 percent respectively. However, it also said the country risks missing its deficit-reduction goal because of extra budget spending such as tax cuts for low earners and perks for civil servants and pensioners.
Prime Minister Mariano Rajoy is trying to square pressure to reduce the deficit from Brussels authorities with his own political needs. He’s promised further perks to appease political rivals and get his very delayed budget for 2018 approved, securing at least another year in office with his minority government. On the flip-side, that could translate into further budget slippages.
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