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VOL. 42 | NO. 44 | Friday, November 2, 2018

Eurozone economy seen slowing through to 2020

The Associated Press

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Economic growth across the 19-country eurozone is set to slow down further in coming years and become increasingly reliant on domestic factors like consumer spending, the European Union said Thursday.

In its latest economic projections, the EU's executive Commission said eurozone growth this year is expected to moderate to 2.1 percent from last year's decade-high rate of 2.4 percent. It expects a further easing to 1.9 percent in 2019 and 1.7 percent in 2020.

It blamed rising global uncertainty, international trade tensions, and higher oil prices for the slowdown. It also said a slower pace in the fall in unemployment could add to the dampening effect.

Pierre Moscovici, the commissioner responsible for economic matters, said economic growth will be increasingly reliant on domestic factors, with consumer spending benefiting from stronger wage growth and potential tax cuts. He also said low interest rates should support investment, another pillar of domestic growth.

One of the main reasons why the eurozone economy has been buoyant over the past couple of years has been the pick-up in global trade. That's helped many of the bloc's export-oriented economies, such as Germany, but trade growth appears to be waning, partly due to more protectionist policies around the world, notably between the United States and China.

"Trade tensions have not quietened down yet," Moscovici said.

Moscovici identified worries over trade as one of the major risks to the eurozone's economic outlook. He also warned of tighter financial conditions globally, like higher interest rates, if the U.S. economy overheats.

Policymakers have wrestled in recent years with the question of how to boost consumer spending in the eurozone. Consumers in many parts of the single currency bloc, battered by years of crisis and relatively high unemployment, have been wary of spending.

But unemployment is now falling across the region, even in countries like Greece and Spain that once saw levels around 25 percent, and wages are rising, increasing hope that consumption will rebound, too.

The Commission is forecasting further decreases in unemployment from 8.4 percent this year to 7.9 percent next and 7.5 percent in 2020.

One country that appears to be doing poorly is Italy, whose new populist coalition government is in dispute with the Commission over its budget.

The Commission expects the Italian economy to grow by only 1.2 percent in 2019, below the 1.5 percent projected by the government. And in 2020, the Commission's forecast Italian growth of only 1.3 percent, again 0.3 percentage point-lower than the projection from Rome.

As a result, the Commission is forecasting higher budget deficits for Italy, notably for next year. Rather than the 2.4 percent shortfall predicted by Italy, the Commission expects the Italian budget deficit to be 2.9 percent.

The Commission has chastised Italy for a spending plan that will raise its deficit next year to three times that which was previously agreed.

Italy must submit a revised budget by Nov. 13, but Rome appears to be standing firm, raising the prospect of sanctions by the Commission.

"There cannot be a sort of negotiation on this," Moscovici said.