EU Holds Its Nerve on 2018 Economic Outlook Amid Growing Threats

(Bloomberg) -- The European Commission shrugged off the euro area's sluggish start to the year and said economic growth will almost match 2017's best-in-a-decade performance.

A day after data showed first-quarter growth was the weakest since 2016, the European Union's executive arm said the cooling looks likely to be partly temporary. But it also cautioned that risks to the euro-area outlook have risen and are now tilted to the downside. It listed financial-market volatility, U.S. overheating and an escalation of trade protection as key threats.

For 2018, the commission kept its euro-area growth forecast at 2.3 percent, just below the 2.4 percent pace reached in 2017. For 2019, expansion may ease slightly to 2 percent, also in line with its last forecast in February. Its inflation forecasts were also left unchanged.

The projections come against the backdrop of signs of economic weakness in the currency bloc, which pose a challenge for the European Central Bank as it contemplates paring back monetary-stimulus measures. However, the commission isn't alone in arguing that the slowdown will pass, with economists at Goldman Sachs and Bloomberg Economics among those expecting a rebound as the year progresses.

After years tackling the financial and sovereign-debt crises, the euro-area economy has racked up 20 straight quarters of growth. While the expansion is forecast to continue, the EU said there are a number of uncertainties, including financial-market volatility, overheating in the U.S., faster-than-expected Federal Reserve tightening and the escalation of trade tensions.

On the last risk, the EU's blunt assessment is that “trade disputes could blow the current expansion off course.”

Policy Challenge

The commission's forecasts come amid a debate about whether the slowdown at the start of 2018 will persist. The effect of bad weather is one reason to believe it will prove temporary, while some say indicators had surged too high and are merely adjusting to a more sustainable level.

A report on May 2 showed that manufacturing continued to cool at the start of the second quarter. Export growth softened, with some firms blaming the stronger euro.

President Mario Draghi and his ECB colleagues have acknowledged the moderation this year, though they haven't expressed any deep concerns about it just yet. On inflation, the commission still sees it averaging 1.5 percent this year and 1.6 percent in 2019. The ECB aims to get inflation to just below 2 percent over the medium term.

“Lately, developments in the euro area have been rather positive, which has allowed for a moderate exit from loose policies,” ECB Governing Council member Ardo Hansson said in Tallinn on Thursday.

A relatively new area of concern is that of a major trade war erupting, with the International Monetary Fund warning it could undermine global growth. The EU and businesses warned on May 1 of more market uncertainty that affects business decisions following the Trump administration's decision to delay U.S. steel and aluminum tariffs for the next month.

"An escalation of trade protectionism presents an unambiguously negative risk to the global economic outlook," the commission said. “Due to its openness, the euro area would be particularly vulnerable.”

--With assistance from Zoe Schneeweiss Harumi Ichikura Kevin Costelloe Catherine Bosley Ott Ummelas and Carolynn Look

To contact the reporter on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Nikos Chrysoloras at nchrysoloras@bloomberg.net, Jones Hayden

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