The European Commission (EC) has gone out on a limb. Its Winter Economic Forecast has put improvement of gross domestic product (GDP) at 1.3% for the euro area in 2015 and 1.9% for 2016. The goal may be set too high, given the economic trouble that has emerged recently. Additionally, the largest economies in the euro area, particularly Germany, face slow growth rates, at least compared to the United States.
Germany’s economy is expected to grow 1.5% this year and 2.0% next. With a GDP that is such a large portion of the euro area economy, German growth only has to slip a modest amount to drag the overall number down. The second largest economy, France, has hovered near recession. However, the EC forecast for growth there is 1.0% this year and 1.8% next. Unemployment in France is expected to be above 10% this year and in 2016, which means there is a great deal of risk to its recovery, particularly if it is based on consumer demand.
One GDP forecasts that is most improbable, based on recent history, is for Spain, where the expansion is expected to be 2.3% this year and 2.5% in 2016. Many people in Spain have begun to react sharply to austerity measures, and observers worry that the nation may head in the direction Greece has. Worry about a default, or only a threat of one, could strangle the country’s access to capital.
The forecast for Italy, at least, appears sound. GDP is expected to rise only 0.6% this year and 1.3% next.
The first of two arguments against the EC forecast is that trading partners, particularly Russia and China, have slowing economies, although the baseline from which each one struggles is entirely different. The other argument is that high unemployment in some countries will smother consumer spending.
On a wider basis, some of the muted optimism about the European economy has its foundation in European Central Bank (ECB) actions and lower energy prices. However, one could cause inflation and one deflation. Europe continues to face immediate deflation based on recent economic data, and a concern that the ECB’s massive trillion rescue plan is too little, too late.
The EC has posted a forecast that is based more on hope than on reality.