The steady growth of the past years is of course good news, but expansionary policies are still needed. The conditions for an acceleration of economic activity have to be created. Therefore, we need to increase public investments to support industrial activity and after so many years of stagnation and even decline of real wages, workers deserve their share of the economic growth. As this supports internal demand, it will also make the recovery more sustainable. The economic upswing has to be to the benefit of all workers across Europe
The European economy has entered its fifth year of economic recovery. The economic upswing is modest (below 2%) but persistent and will probably remain so for the next couple of years. This is the conclusion of the recent Spring 2017 Economic Forecast by the European Commission. The report expects a stable economic growth of 1.9% in both 2017 and 2018. The economy is supported by low interest rates, the phasing out of austerity policies, a gradual improvement of global trade and the relative weak exchange rate of the euro.
Global economic growth is also regaining momentum as it is expected to strengthen from 3.2% in 2016 to 3.9% in 2018.
But growth will remain very sluggish in Italy (0.9% this year, 1.1% in 2018), while the UK will also face a slowdown of GDP from 1.8% in 2016 to 1.3% in 2018. Uncertainties surrounding Brexit (investment decisions are postponed) and the pick-up in inflation which is eating into the purchasing power of workers explain this relatively poor performance.
Investment is expected to expand fairly steadily thanks to attractive financing conditions and the accommodative policies of the ECB. Still it remains relatively weak because of the modest growth outlook, uncertainty and continued deleveraging. In 2016 investment accounted for 19.7% of GDP in the EU. This is the highest share since the start of the recovery but still 2pps below the average between 2000 and 2005.
Bank lending is improving as banks have reduced the risks in their balance sheets and strengthened their capital position. Real long-term financing costs will also remain in negative territory. Nevertheless, the growth rate of bank lending remains below GDP growth.
The economic recovery is also wage-poor as real wages are expected to growth only very modestly: 0.3% this year and 0.7% next year. Inflation was affected by oil price increases. However, core inflation (without energy and unprocessed food prices) remains very low but the risk of deflation has evaporated.
Unemployment continues its downward trend and is expected to fall to 7.7%, its lowest level since 2008. At the end of 2018 10 million jobs will have been created since the start of the recovery in 2013.
The EU faces a serious problem of underemployment
Although the official employment rate is declining, this figure doesn’t catch the full problem of unemployment. Indeed, only those that are unemployed, actively looking for a job and available for the labour market within two weeks are counted in the official statistics of Eurostat.
This means that 6.8m involuntary part-time workers, 6.4m “discouraged” workers (unemployed and not looking anymore for a job) and 1.5m people not immediately available are not taken up in the statistics. Doing so would mean an unemployment rate of almost twice as high (according to Eurostat, the EU currently has 15.6m unemployed).
Negative current account imbalances in Southern-European countries have been corrected over the years. At the same time, large current account surpluses have been built up in countries like Germany, Ireland, Denmark, the Netherlands, Austria, Sweden. More expansionary policies in these countries are needed to absorb these surpluses and could help to boost the recovery at the European level.
The deficit-to-GDP ratio is expected to fall from 2.4% in 2015, to 1.5% in 2018. The decline is supported by the growth in the denominator (GDP) as well as by the reduction in interest expenditures. Only France and Romania (with unchanged policies) are expected to register deficits above the Maastricht-threshold of 3% in 2018. The fiscal policy stance (when looking only to the structural deficits, thereby eliminating the impact of the economic cycle) will probably stay broadly neutral over the next years. However, the reduced deficits have created a leeway for a positive fiscal stance (something also the Commission is calling for in its latest Annual Growth Survey) e.g. by stepping up public investments.
There are still a number of risks surrounding these forecasts: the unpredictability of Trump, geopolitical tensions, high levels of non-performing loans in the banking sector of some member states, Brexit, very sluggish productivity growth or the highly indebted Chinese economy.
Nevertheless, the financial crisis has receded (with Greece as an unfortunate exception) and confidence in the EU’s economies is growing. The recovery is also creating new jobs. But in many Member States unemployment remains unsustainably high. For industriAll Europe the challenge now is to make this recovery more resilient and more inclusive, in order to offer a positive perspective to all workers in the European Union.
“Although the financial crisis is over, its legacy is still there. Europe’s South still has an unacceptable level of unemployment, 1 out of 10 employees is confronted with in-work poverty and 1 out of 4 families is at risk of poverty and social exclusion. There are also the 6 million forgotten unemployed, that are not included in the labour market statistics. And many of the newly created jobs are temporary and of poor quality.”, Luc Triangle, General-Secretary of industriAll Europe, comments.
“The steady growth of the past years is of course good news, but expansionary policies are still needed. The conditions for an acceleration of economic activity have to be created. Therefore, we need to increase public investments to support industrial activity and after so many years of stagnation and even decline of real wages, workers deserve their share of the economic growth. As this supports internal demand, it will also make the recovery more sustainable. The economic upswing has to be to the benefit of all workers across Europe”, Luc Triangle concluded.