Roundup: EU autumn forecast predicts modest growth amid challenges

The European Commission on Wednesday predicted modest economic growth across the 19-country eurozone and the 28-country European Union (EU), according to its autumn 2016 economic forecast.

The report indicated that real gross domestic product (GDP) in 2016 was now expected to rise 1.7 percent in the eurozone, 0.1 percentage point higher than the previous spring report, while GDP growth in the EU remained the same at 1.8 percent.

For 2017, the EU executive arm forecasts a growth of 1.5 percent in the eurozone and 1.6 percent in the EU, both 0.3 percentage points lower than previous predictions.

The European Commission also predicted a growth of 1.7 percent in the eurozone and 1.8 percent in the EU in 2018.

The report attributed Europe's modest growth to recent labor market gains and rising private consumption, saying that expectations were for employment to continue growing and wages to pick up slightly.

"The pace of job creation, boosted by recent reforms in many countries, decreasing public deficits in the euro area, a pick-up in investment and more dynamic EU-intra trade are particularly encouraging," Pierre Moscovici, European Commissioner for Economic and Financial Affairs, told a press conference.

The report also noted there was a risk that the economy's weak performance in recent years could hold back growth, and persistent slack pointed to the possibility of faster growth without undue inflationary pressures.

In the coming years, the European economy will no longer be able to rely on the exceptional support from external factors like falling oil prices and currency depreciation, the report added.

Having suffered from low demand growth and expectations of weak potential growth, ongoing corporate debt reduction in some EU countries and heightened uncertainty, the investment environment is finally brightening and investment is expected to pick up in 2018.

Overall in the 28 member bloc, investment is forecast to grow by 3.3 percent this year, 3.1 percent in 2017 and 3.5 percent in 2018.

Meanwhile, inflation was said to pick up from a very low level, driven by energy prices. The EU predicts that inflation in the euro area is expected to rise from 0.3 percent in 2016 to 1.4 percent in both 2017 and 2018. In the EU, inflation is forecast to rise from 0.3 percent this year to 1.6 percent in 2017 and 1.7 percent in 2018.

Moreover, employment in the euro area and the EU is expected to grow by 1.4 percent this year, faster than at any time since 2008.

Even though the labor force is expected to grow faster this year due to increased participation rates and the gradual integration of refugees in the labor market, unemployment in the euro area is expected to decline relatively fast, from 10.1 percent in 2016 to 9.7 percent next year and 9.2 percent in 2018, report said.

For the euro area, this is the lowest level since 2009. It compares to a 2013 peak of 12 percent, but remains well above the 7.5 percent low reached in 2007.

The trend is expected to be the same for the EU as a whole, with unemployment set to fall from 8.6 percent this year to 8.3 percent next year and 7.9 percent in 2018.

Over the forecast horizon, government public deficit and debt ratios in both zones are projected to decline.

The general government deficit in the eurozone as a whole is expected to decrease from 1.8 percent of GDP in 2016 to 1.5 percent in 2017 and 2018. Meanwhile, the debt-to-GDP ratio is expected to fall from 91.6 percent in 2016 to 89.4 percent in 2018.

The EU said the current weakness of global trade outside the EU is weighing on euro area exports despite the resilience of intra-euro area trade. Imports are expected to grow faster than exports in the euro area. Therefore, the euro area's current account surplus is forecast to decline over the forecast horizon.

As for the 28 member states, the EU said economic activity is set to increase further but to remain uneven over the forecast period.

In Britain, growth is projected to soften further to 1.9 percent in 2016 after moderating to 2.2 percent in 2015.

Nevertheless, growth is projected to almost halve in 2017, to 1.0 percent, reflecting the impact of heightened uncertainty following the referendum and its impact on business confidence and broader economic conditions.

However, Britain's growth is expected to pick up somewhat in 2018 as net exports continue to rise sharply and partially shield the economy from continued weakness in domestic demand, the report said.

The EU said downside risks have intensified as a result of Britain's "leave" vote and concerning banks.

"In the light of increased global uncertainty, it is now even more important to pursue sound and prudent macroeconomic and budgetary policies," said Valdis Dombrovskis, the European Commissioner responsible for the euro and social dialogue.

Moscovici said European growth will hold up in 2017 against a more challenging backdrop than in the spring.

"In these volatile and uncertain times, no effort must be spared to safeguard and strengthen this recovery -- and ensure that all sections of society feel its benefits," he added.

The European Commission's 2016 economic forecast is a seasonal report based on a set of external assumptions concerning exchange rates, interest rates and commodity prices. The previous report was released in May. Endit