Eurozone Growth Set to Accelerate as Threats Subside -- 2nd Update

By Emre Peker Features Dow Jones Newswires

The European Union said the eurozone was on track to post its fastest growth rate in a decade as political uncertainties that threatened to cast a shadow over the bloc this year largely failed to materialize.

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Driven by dimming political turbulence that economists had feared could hold back growth this year, the EU's regular forecast said gross domestic product in the 19-member eurozone would grow by 2.2% in 2017, beating its expectation of 1.7% in the previous forecast in May.

On the back of robust consumer spending and a global economic recovery, the 28-member bloc's GDP, meanwhile, is seen expanding this year by 2.3%, up from the 1.9% previously forecast.

The improving economic outlook reflects a broader global economic upswing that is stoking investments by EU companies as political and economic uncertainties dim. Centrist, pro-European governments kept power in Germany, France and the Netherlands in the wake of a busy election cycle this year, while the European Central Bank opted to maintain its accommodative monetary policies.

"The long-lasting moderate expansion has shifted into more robust and long-lasting growth," said Pierre Moscovici, the European commissioner for economic and financial affairs, taxation and customs. "It is without a doubt that we are entering a new phase in the European economic recovery."

Eurozone GDP growth has yet to catch up with the 3% expansion in 2007, before the global financial crisis hit.

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Despite the upbeat projections, the EU said it still faces labor, wage and inflationary pressures that are compounded by risks posed by the U.K.'s exit from the bloc and President Donald Trump's protectionist economic policies.

The threats were evident in the bloc's forecasts for 2018 and 2019, when economic growth is expected to slow down. The eurozone is seen expanding to 2.1% in 2018--still up from a previous expectation of 1.8%--with the growth rate dipping to 1.9% in 2019, when Britain will leave the EU.

However, as the EU eyes economic growth for all its members next year for the first time since 2007, its outlook for the U.K. is souring. The commission stressed that its post-Brexit economic forecasts were based on a purely technical assumption of status quo in EU-U.K. trade relations.

Even under a no-change scenario, Britain's economic growth would slump to 1.1% in 2019, making it the slowest growing economy after Italy's 1% expansion, the EU said. The bloc also cut its U.K. 2017 economic growth forecast to 1.5% from 1.8% while keeping it steady at 1.3% for next year.

The U.K.'s largely domestic-driven economy has been hit by accelerating inflation in the wake of the Brexit vote last year, curtailing consumer spending.

"Growth in private consumption will be modest and uncertainty will continue to weigh on business investment decisions," Mr. Moscovici said.

Unlike the U.K., Spain is expected to avoid economic damages from the political upheaval triggered by an independence push in one of its most prosperous regions, Catalonia.

The EU raised its 2017 Spanish GDP growth forecast to 3.1% from 2.8% while bumping its outlook for next year to 2.5% from 2.4% previously. The Spanish economy is seen expanding by 2.1% in 2019.

"We think, at this stage, that the macroeconomic impact is limited, almost negligible," Mr. Moscovici said of the secessionist move that Madrid has moved to quash.

Eurozone inflation is also expected to remain broadly flat at 1.5% in 2017, down from a 1.6% forecast previously, decelerating to 1.4% next year before rising marginally to 1.6% in 2019. The ECB targets just below 2% inflation.

Unemployment across the currency union is expected to drop faster than expected in May, dipping to 9.1% by year-end and then to 8.5% in 2018 and 7.9% the following year. Previously, the EU had expected 9.4% unemployment this year and 8.9% in 2018.

Yet the EU warned that job creation is poised to slow as governments' stimulus measures wind down and "untypically low" wage growth continued to weigh on economic performance.

Still, with economic growth gathering pace, eurozone budget deficits are expected to drop faster than previously anticipated, the EU said. Members of the common-currency are seen with an average deficit of 1.1% of GDP in 2017, down from 1.4% in the earlier forecast. The gap is seen declining to 0.9% next year, down from the previous estimate of 1.3%, and to 0.8% in 2019.

"The economies of all member states are expanding and their labor markets improving, but wages are rising only slowly," the EU said, citing slack employment conditions. "GDP growth and inflation are therefore still dependent on policy support."

Wiktor Szary in London and Jeannette Neumann in Madrid contributed to this article.

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

(END) Dow Jones Newswires

November 09, 2017 09:44 ET (14:44 GMT)