The European economy is set for its seventh consecutive year of growth in 2019, with all Member States’ economies due to expand. Growth in the euro area was stronger than expected in the first quarter of the year due to a number of temporary factors such as mild winter conditions and a rebound in car sales. It also benefited from fiscal policy measures, which boosted household disposable income in several Member States. The near-term outlook for the European economy, however, is clouded by external factors including global trade tensions and significant policy uncertainty. These have continued to weigh on confidence in the manufacturing sector, which is the most exposed to international trade, and are projected to weaken the growth outlook for the remainder of the year.

As a result, the forecast for euro area GDP growth in 2019 remains unchanged at 1.2%, while the forecast for 2020 has been lowered slightly to 1.4% following the more moderate pace expected in the rest of this year (spring forecast: 1.5%). The GDP forecast for the EU remains unchanged at 1.4% in 2019 and 1.6% in 2020.

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: “All EU economies are still set to grow this year and next, even if the robust growth in Central and Eastern Europe contrasts with the slowdown in Germany and Italy. The resilience of our economies is being tested by persisting manufacturing weakness stemming from trade tensions and policy uncertainty. On the domestic side, a “no deal” Brexit remains a major source of risk.” 

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “The European economy continues to expand against a difficult global backdrop. All EU countries are set to grow again in both 2019 and 2020, with the strong labour market supporting demand. Given the numerous risks to the outlook, we must intensify efforts to further strengthen the resilience of our economies and of the euro area as a whole.”

Domestic demand driving growth in the EU

While growth earlier this year benefited from a number of temporary factors, the outlook for the rest of the year looks weaker as prospects for a quick rebound in global manufacturing and trade have dimmed. GDP growth in 2020 is forecast to be higher, partly due to a higher number of working days. Domestic demand, particularly household consumption, continues to drive economic growth in Europe helped by the continued strength in the labour market. GDP is forecast to grow in all EU Member States this year and next but growth will be significantly stronger in some areas (e.g. Central and Eastern Europe, Malta, and Ireland) than in others (e.g. Italy, Germany).

Lower inflation expected as oil prices fall

The forecasts for headline inflation in the euro area and the EU have been lowered by 0.1 percentage points this year and next, mainly due to lower oil prices and the slightly weaker economic outlook. Inflation (Harmonised Index of Consumer Prices) in the euro area is now forecast to average 1.3% in both 2019 and 2020 (spring forecast: 1.4% in 2019 and 2020), while in the EU it is forecast to average 1.5% in 2019 and 1.6% in 2020 (spring forecast: 1.6% in 2019 and 1.7% in 2020).

Downside risks have increased

Risks to the global economic outlook remain highly interconnected and are mainly negative. An extended economic confrontation between the US and China, together with the elevated uncertainty around US trade policy could prolong the current downturn in global trade and manufacturing and affect other regions and sectors. This could have negative repercussions for the global economy including through financial market disruptions. Tensions in the Middle East also raise the potential for significant oil price increases. Domestically, Brexit remains a major source of uncertainty. Finally, there are also significant risks surrounding near-term growth drivers and economic momentum in the euro area. Weakness in the manufacturing sector, if it were to endure, and depressed business confidence, could spill over to other sectors and harm labour market conditions, private consumption and ultimately growth.

For the UK, a purely technical assumption

In light of the process of the withdrawal of the UK from the EU, projections for 2019 and 2020 are again based on a purely technical assumption of status quo in terms of trading patterns between the EU27 and the UK. This is for forecasting purposes only and has no bearing on future negotiations between the EU and the UK.

Background

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 28 June. For all other incoming data, this forecast takes into consideration information up until 2 July.

The Commission publishes four economic forecasts each year. The forecasts published each winter and summer only cover annual and quarterly GDP and inflation for the current and following year for all Member States and the euro area, as well as EU aggregates.

The European Commission’s next economic forecast will be the autumn economic forecast in November 2019.

For More Information

Full document: Summer 2019 Economic Forecast

Compliments of the European Commission

The European Council elected today Charles Michel as President of the European Council. The President of the European Council is elected for the period from 1 December 2019 until 31 May 2022. The mandate of two and a half years of the President of the European Council is renewable once. The European Council also welcomed the decision of the Heads of State or Government of the Member States whose currency is the euro to appoint Charles Michel as President of the Euro Summit, for the same term of office.

The European Council adopted the decision proposing Ursula von der Leyen to the European Parliament as candidate for President of the European Commission. The proposed candidate will need to be elected by the European Parliament by a majority of its component members.

The European Council also considered Josep Borrell Fontelles to be the appropriate candidate for High Representative of the Union for Foreign Affairs and Security Policy. The formal appointment of the High Representative by the European Council requires the agreement of the President-elect of the Commission.

The President of the Commission, the High Representative and the other members of the Commission will be subject as a body to a vote of consent by the European Parliament, before the formal appointment by the European Council. Their term of office will last 5 years from the end of the current Commission until 31 October 2024.

The European Council also considered Christine Lagarde to be the appropriate candidate for President of the European Central Bank. The European Council will take a formal decision on the appointment on the basis of a Council recommendation, after having consulted the European Parliament and the ECB’s Governing Council. The mandate for the President of the European Central Bank is for 8 years non-renewable.

Compliments of the European Council

Small and medium-sized enterprises (SMEs) have been a significant driver of employment growth in recent years, mainly through the creation of new firms, including in high-growth sectors such as information and communication technologies (ICT). But the new OECD SME and Entrepreneurship Outlook highlights that most SME job creation has been in sectors with below average productivity levels, with SMEs typically paying employees around 20 percent less than large firms.

While SMEs are more engaged in new organisational or marketing practices than large firms, and sometimes more innovative in developing new products and processes, many continue to struggle disproportionately to navigate the increasing complexity in technologies and markets.

“We need a fundamental rethinking of SME and entrepreneurship policies to improve business conditions and access to resources. This will enable workers to have higher wages and greater productivity, as smaller employers harness major trends like digitalisation,” said OECD Secretary-General Angel Gurría, launching the report at the annual OECD Forum. “We need a renewed policy and measurement agenda to understand how countries, regions and cities can capitalise on their many diverse small businesses as drivers for inclusive and sustainable growth.”

Bringing together unique data and evidence on SME performance and policies, this first edition of the OECD SME and Entrepreneurship Outlook offers policymakers new benchmarking tools and insights on good practices to help frame national SME and entrepreneurship policies. The report illustrates that SMEs are more dependent on the business ecosystem and the policy environment than large companies, and identifies a number of key challenges:

• While the wage gap is smaller for exporting SMEs, trade barriers are disproportionately large, and recent trade tensions may further hamper their ability to benefit from globalisation.
• SMEs struggle to combine different types of innovation, and continue to face size-related barriers in accessing strategic resources, such as skills, finance and knowledge. A quarter of SMEs in the EU reported a lack of skilled staff or experienced managers as their most important problem and, in most OECD countries, less than one-quarter of small firms provided ICT training in 2018.
• The digital transformation provides scope for productivity growth but large adoption gaps exist compared to larger firms, with half as many small firms in the OECD investing in cloud computing services in 2016, for example.

Governments have been proactive in their efforts to improve framework conditions and address size-related barriers for SMEs. The 36 country profiles in the OECD SME and Entrepreneurship Outlook show that, in the OECD area, governments are focused on accelerating innovation diffusion to SMEs; ensuring SMEs keep pace with the digital transformation; engaging SMEs in upskilling; scaling-up innovation networks and MNE-SME linkages; and levelling the playing field in product markets, public procurement and ‘lead’ innovative markets. Small businesses are also benefiting from the strengthening of e-government services and from reforms undertaken in OECD countries aiming to lower administrative and tax burdens and enforce smart regulation.

Despite these efforts, the complexity of regulatory procedures remains a major obstacle for SMEs and entrepreneurs. Furthermore, the pace of structural reform has slowed in recent years and progress remains uneven in areas that are key for business creation and SME investment, such as insolvency regimes, civil justice and enforcement of competition laws.

The report argues for more efficient governance and more coherent arrangements across national and subnational levels, regions and cities. It also calls for fostering international peer learning and enhanced monitoring and evaluation capacity.

Compliments of the OECD