BRUSSELS – The eurozone’s economy will cool over 2018 and in the coming years as global demand for the bloc’s exports wanes, and a sharper slowdown is possible if the United States economy overheats or if existing trade tussles escalate, the European Union said on Thursday.
The EU said it continues to expect that the gross domestic product of the 19 countries that use the euro will grow 2.1% in 2018, having expanded by 2.4% in 2017, which was the currency area’s best year in a decade. The EU cut its 2019 growth forecast to 1.9% from 2% in July, and now projects a further slowdown to 1.7% in 2020.
“Barring major shocks, GDP should continue to grow at a moderate pace,” wrote Marco Buti, head of the European Commission’s economics department. “The road ahead is however fraught with uncertainty and numerous, interconnected risks.”
The EU highlighted a number of threats, chiefly the possibility that the US economy could grow too rapidly in response to cuts in taxes and increased government spending, prompting the US Federal Reserve to raise its key interest rate more rapidly than currently anticipated. The EU warned that this could spread “turmoil” through global financial markets, as well as weaken growth in developing and developed economies.
The EU also worries that a rapidly expanding US economy will suck in more imports, widening the country’s trade deficit and prompting fresh tariff increases.
“Should extensive new tariff and non-tariff barriers emerge and spread, the negative impact on international trade and global growth would be sizeable,” Buti wrote.
The EU further warned of threats to continued growth from within the bloc, underlining increased borrowing by Italy’s new government and the possibility that the United Kingdom could leave the bloc in March abruptly and without a new trade agreement.
“Uncertainty about the outlook for public finances in Italy has led to higher interest spreads, and the interaction of sovereign debt with the banking sector is still of concern,” Buti wrote.