The European economy has entered its fifth year of recovery, which is now reaching all EU Member States. This is expected to continue at a largely steady pace this year and next.
In its Spring Forecast released today, the European Commission expects euro area GDP growth of 1.7% in 2017 and 1.8% in 2018 (1.6% and 1.8% in the Winter Forecast). GDP growth in the EU as a whole is expected to remain constant at 1.9% in both years (1.8% in both years in the Winter Forecast).
Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: "Today's economic forecast shows that 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, with better performance recorded in the economies that have implemented more ambitious structural reforms. To redress the balance, we need decisive reforms across Europe from opening up our products and services markets to modernising labour market and welfare systems. In an era of demographic and technological change, our economies have to evolve too, offering more opportunities and a better standard of living for our population."
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: "Europe is entering its fifth consecutive year of growth, supported by accommodative monetary policies, robust business and consumer confidence and improving world trade. It is good news too that the high uncertainty that has characterised the past twelve months may be starting to ease. But the euro area recovery in jobs and investment remains uneven. Tackling the causes of this divergence is the key challenge we must address in the months and years to come.”
Global growth to increase
The global economy gathered momentum late last year and early this year as growth in many advanced and emerging economies picked up simultaneously. Global growth (excluding the EU) is expected to strengthen to 3.7% this year and 3.9% in 2018 from 3.2% in 2016 (unchanged from the Winter Forecast) as the Chinese economy remains resilient in the near term and as recovering commodity prices help other emerging economies. The outlook for the US economy is largely unchanged compared to the winter. Overall, net exports are expected to be neutral for the euro area's GDP growth in 2017 and 2018.
A temporary rise in headline inflation
Inflation has risen significantly in recent months, mainly due to oil price increases. However, core inflation, which excludes volatile energy and unprocessed food prices, has remained relatively stable and substantially below its long-term average. Inflation in the euro area is forecast to rise from 0.2% in 2016 to 1.6% in 2017 before returning to 1.3% in 2018 as the effect of rising oil prices fades away.
Private consumption to slow with inflation, investment remaining steady
Private consumption, the main growth driver in recent years, expanded at its fastest pace in 10 years in 2016 but is set to moderate this year as inflation partly erodes gains in the purchasing power of households. As inflation is expected to ease next year, private consumption should pick up again slightly. Investment is expected to expand fairly steadily but remains hampered by the modest growth outlook and the need to continue deleveraging in some sectors. A number of factors support a gradual pick-up, such as rising capacity utilisation rates, corporate profitability and attractive financing conditions, also through the Investment Plan for Europe.
Unemployment continues to fall
Unemployment continues its downward trend, but it remains high in many countries. In the euro area, it is expected to fall to 9.4% in 2017 and 8.9% in 2018, its lowest level since the start of 2009. This is thanks to rising domestic demand, structural reforms and other government policies in certain countries which encourage robust job creation. The trend in the EU as a whole is expected to be similar, with unemployment forecast to fall to 8.0% in 2017 and 7.7% in 2018, the lowest since late 2008.
The state of public finances is improving
Both the general government deficit-to-GDP ratio and the gross debt-to-GDP ratio are expected to fall in 2017 and 2018, in both the euro area and the EU. Lower interest payments and public sector wage moderation should ensure that deficits continue to decline, albeit at a slower pace than in recent years. In the euro area, the government deficit to-GDP ratio is forecast to decline from 1.5% of GDP in 2016 to 1.4% in 2017 and 1.3% in 2018, while in the EU the ratio is expected to fall from 1.7% in 2016 to 1.6% in 2017 and 1.5% in 2018. The debt-to-GDP ratio of the euro area is forecast to fall from 91.3% in 2016 to 90.3% in 2017 and 89.0% in 2018, while the ratio in the EU as a whole is forecast to fall from 85.1% in 2016 to 84.8% in 2017 and 83.6% in 2018.
Risks to the forecast are more balanced but still to the downside
The uncertainty surrounding the economic outlook remains elevated. Overall, risks have become more balanced than in the winter but they remain tilted to the downside. External risks are linked, for instance, to future US economic and trade policy and broader geopolitical tensions. China's economic adjustment, the health of the banking sector in Europe and the upcoming negotiations with the UK on the country's exit from the EU are also considered as possible downside risks in the forecast.
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 25th April 2017. Interest rate and commodity price assumptions reflect market expectations derived from derivatives markets at the time of the forecast. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 25th April 2017. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.
(Source: EU Commission)
New rules to help prevent tax avoidance via non-EU countries were agreed at the recent meeting of the Economic and Financial Affairs Council. The Commission welcomes this agreement which will prohibit multinational companies from escaping corporate tax by exploiting differences between the tax systems of member states and those of non-EU countries (so-called 'hybrid mismatches').
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said: "Today is yet another success story in our campaign for fairer taxation. Step by step, we are eliminating the channels used by certain companies to escape taxation. I congratulate the member states for agreeing on this tangible measure to clamp down on tax abuse and install a fairer tax environment in the EU."
The new provisions build on the Anti-Tax Avoidance Directive (ATAD) agreed last July, which sets out EU-wide anti-abuse measures against tax avoidance. Hybrid mismatches occur when countries have different rules for the tax treatment of certain income or entities, which multinational companies can abuse to avoid being taxed in either country. The agreement reached today (ATAD 2) will ensure that hybrid mismatches of all types cannot be used to avoid tax in the EU, even where the arrangements involve third countries. Today's agreement comes less than four months after the Commission put forward its proposal.
The new rules will come into force on January 1st 2020, with a longer phasing-in period of 2022 for one article (Art. 9a).
The binding measures agreed today build on the extensive work done over the past two years to tackle corporate tax avoidance and ensure fair and effective taxation in the EU.
Major initiatives put forward by the Juncker Commission to boost tax transparency and reform corporate taxation are already reaping results. Member states agreed on the ambitious Anti-Tax Avoidance Directive last July, ensuring that anti-abuse measures will apply throughout the EU from 2019. Member states also agreed – in record time – Commission proposals to increase transparency on tax rulings and on multinationals' tax related information. The proposal for public Country-by-Country Reporting by large companies is being negotiated by Council and the European Parliament, as is a proposal to strengthen the Anti-Money Laundering Directive.
A number of other substantial corporate tax reforms have also been proposed, notably the re-launch of the Common Consolidated Corporate Tax Base (CCCTB) in October 2016. Member states are also working on a common EU list of third country tax jurisdictions that do not conform to international tax good governance standards. The list should be ready by the end of the year.
(Source: EU Commission)
The UK is set to be one of biggest winners from the EU-Canada CETA free trade deal. With 10,570 companies already exporting a wide variety of goods from baby wipes to aircraft parts to Canada and supporting over 240,000 jobs, the UK economy is in the best position to benefit from the removal of import duties, lifting of barriers and potential trade growth, according to data from a new web tool on CETA published by the European Commission.
And it is not only big business that is taking advantage of the free transatlantic trade as 79% of the EU exporters to Canada are small and medium-sized enterprises.
In exports to the second biggest North American economy, the UK is ahead of both Germany and France which have 10,464 and 9,732 companies respectively selling goods and services to Canada and significantly fewer jobs benefitting from that trade – 141,000 for Germany and 77,000 for France. Whilst there are more Italian companies (13,147) trading with Canada, they only employ about 63,000 people in total.
"CETA in your town", the new interactive map and tool developed by the European Commission, gives a snapshot of EU-Canada trade relations by drawing on a subset of the many companies in cities and towns all over the EU that export to Canada, with examples of products they export.
The trade with Canada is spread fairly evenly across the UK and across business sectors, the map shows. The leading Welsh town for exports to Canada, for example, is Swansea with three companies exporting foam masking tape, ores, slag and ash, bottle closures. Belfast has six companies selling carpets, pharmaceuticals and animal feed to Canada. Glasgow's exports include steel fittings, theatrical goods and alcoholic beverages supplied by some 10 companies with a further ten businesses in Bristol selling a range of items such as aircraft parts, cereals and baby wipes.
The Comprehensive Trade and Economic Agreement (CETA) between the EU and Canada is expected to save exporters over £425 million (€500 million) a year in import duties. It was signed by the President of the European Commission Jean-Claude Juncker, the President of the European Council Donald Tusk, the Prime Minister of Slovakia Robert Fico, and the Canadian Prime Minister Justin Trudeau on 30 October 2016, but the deal still has to go through two main stages of democratic oversight. First, the European Parliament must give its consent to CETA for it to apply provisionally. The second stage involves parliaments in EU countries and only once they approve the agreement will CETA come fully into force.
(Source: EU Commission)
