EU Warns on Growth Threat From Brexit, US Policies; Raises Forecasts -- Update

By Emre Peker Features Dow Jones Newswires

The European Union raised its 2017 economic growth forecast Thursday, saying the bloc's revival is strengthening despite geopolitical risks that could undermine its fifth year of recovery.

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Gross domestic product in the 28-country EU will grow by 1.9% in both 2017 and 2018, the bloc estimated in its latest economic outlook, up from its February forecast of 1.8%.

It raised its GDP forecast for the 19-member eurozone to 1.7% this year from its previous forecast of 1.6% and maintained its estimate of 1.8% economic growth in 2018.

The thrice-yearly review comes on the heels of Emmanuel Macron's presidential victory in France on a business friendly and pro-EU platform, and as centrist politicians across Europe appear to be beating back a populist backlash against the bloc. After years of tepid economic growth fueled voters' anger against the EU, officials in Brussels say the drag on investments is slowly disappearing as a busy election cycle nears the finish line with Germany's polls in September.

"The high uncertainty that has characterized the past 12 months may be starting to ease," said Pierre Moscovici, the European commissioner for economic and financial affairs, taxation and customs. "Europe is entering its fifth consecutive year of growth, supported by accommodative monetary policies, robust business and consumer confidence and improving world trade."

But while some of the risks to the European economy are ebbing, geopolitical developments and a host of "elevated" uncertainties still pose threats, according to the European Commission--the bloc's executive arm.

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EU officials said the eurozone's recovery from the global financial crisis of 2007-08 faced threats, such as negotiations over Britain's exit from the EU, China's economic adjustment and potential protectionist measures from U.S. President Donald Trump.

Compounding the headwinds facing Europe, and contributing to its uneven recovery, are also high levels of debt and ongoing fragilities in parts of the banking system, Mr. Moscovici said.

"Growth is still held back," he said, citing the hangover from the financial crisis alongside geopolitical uncertainties.

Members of the common-currency area are seen with an average deficit of 1.4% of GDP in 2017, unchanged from the EU's earlier forecast. The gap is seen declining to 1.3% in 2018, down slightly from the previous estimate of 1.4%.

A temporary increase in inflation toward the European Central Bank's target of close to but below 2% will moderate as the impact of rising oil prices fades, the EU said.

The eurozone's inflation rate is seen slightly lower at the end of 2017, at 1.6%, rather than the 1.7% forecast in February, and accelerating to 1.8% in 2018, in line with the EU's previous outlook.

Inflation's low trajectory is also poised to be a boon for European economic growth this year and in 2018, enabling the ECB to keep up monetary stimulus. The commission expects central bank policies "to remain expansionist," Mr. Moscovici said.

Of the EU's most severely hit countries during the financial crisis, Spain, Portugal and Ireland are forecast to bounce back even stronger than previously estimated with growth rates ranging from 1.8% to 4%, according to the commission.

Among other hard-hit countries, Italy's recovery is seen steady at 0.9% while Greek forecasts for this year were pared down to 2.1% from 2.7%--a reflection of the delays in completing the second review of the country's bailout package.

Still, EU officials painted an optimistic picture of declining unemployment, cutting their 2017 forecast for the eurozone to 9.4% from 9.6% and for 2018 to 8.9% from 9.1%.

Unemployment in the broader EU is now seen at 8% this year and 7.7% in 2018--down from the 8.1% and 7.8% previously estimated.

"Growth in the EU is gaining strength and unemployment is continuing to decline. Yet the picture is very different from member state to member state," European Commission Vice President Valdis Dombrovskis said. "To redress the balance, we need decisive reforms across Europe from opening up our products and services markets to modernizing labor market and welfare systems."

Write to Emre Peker at emre.peker@wsj.com

(END) Dow Jones Newswires

May 11, 2017 08:15 ET (12:15 GMT)