Europe’s growth prospects are at risk from a more turbulent external environment with trade tensions and tighter financial conditions at the forefront of global headwinds, according to the latest regional outlook from the International Monetary Fund (IMF).
Downgrading its growth forecasts for Europe for 2018 and 2019, the IMF said Thursday that the “the external environment has become less supportive and is expected to soften further in 2019 owing to slowing global demand, trade tensions and higher energy prices.”
“Tighter financial conditions in vulnerable emerging market economies and maturing business cycles are also weighing on activity.”
Accordingly, growth is projected to moderate from 2.8 percent in 2017 to 2.3 percent in 2018 and 1.9 percent in 2019, the IMF noted.
That said, growth is expected to remain above potential in most countries in the region driven by domestic demand, which has been supported by stronger employment and wages.
The latest forecast is a downgrade from the IMF’s last regional outlook for Europe in May, in which it predicted “growth to stay strong,” reaching 2.6 percent in 2018 and 2.2 percent in 2019.
Since its last more bullish forecast in May, trade tensions between the U.S. and China have increased and the tightening of global financial conditions has been thrown into sharp relief — not to mention political upheavals in Europe, slow progress on structural reforms and ongoing Brexit negotiations.
“In the short term, escalating trade tensions and a sharp tightening in global financial conditions could undermine investment and weigh on growth,” the IMF reported in its latest research.
In the medium term, meanwhile, risks stem from delayed fiscal adjustment and structural reforms, demographic challenges, rising inequality, and declining trust in mainstream policies.
Also, a “no-deal” Brexit would lead to high trade and non-trade barriers between the U.K. and the rest of the European Union with negative consequences for growth, the IMF stated. A “no-deal” Brexit is classed as where the country crashes out of the EU without a trade deal, and reverts to WTO rules.
The report comes after the European Commission on Thursday also reported that growth could stall in the 19-country euro zone due to “many interconnected downside risks.” It forecast growth of 1.9 percent in 2019 (like the IMF) and 1.7 percent in 2020.
Europe is expected to see growth moderate along with most major economies. The Fund released its World Economic Outlook report in October in which it cut its global growth forecasts too, forecasting 3.7 percent in 2018 and 2019 — down 0.2 percentage points from an earlier forecast.
As ever, the Fund reiterated that European countries should “seize the opportunity offered by continued above-potential growth” to implement structural reforms and rebuild room for fiscal policy (the use of spending and tax polies to influence economic conditions).
The IMF has been banging the drum for structural reform in the EU following the region’s sovereign debt crisis, which left several countries — Greece the most notable — severely indebted. But it also signaled that countries like Germany, which has a strong trade surplus, should increase spending too.
Whether anyone in Europe is listening is another matter.
Aside from external pressures from the Sino-U.S. trade conflict and tensions with its powerful neighbor Russia, the region is blighted by political upheaval. Right-wing, populist parties have seen strong gains across the region and the area is facing an uncertain future with Brexit, the forthcoming departure of Chancellor Angela Merkel from politics in 2021 (if not before) and an outright rebellion in Italy over its 2019 spending plans. The European Central Bank’s projected end to its quantitative easing program, due in December, is also on the horizon.