Economic Outlook for Europe: Many stimulating factors, but pace of expansion will accelerate only slightly

Economic researchers at the Kiel Institute for the World Economy (IfW) believe that The EUROFRAME Group, which comprises ten of the most respected economic forecasting and research institutes in Europe’s, is giving an optimistic outlook for the European Economy in its latest forecast. “Even though there are risks from the sliding oil prices and the large number of refugees for the European economy, positive effects for the economy as a whole are currently dominant”, says Klaus-Jürgen Gern, Senior Researcher at the Forecasting Center at the Kiel Institute for the World Economy.

Real GDP in the euro area is expected to rise by 1.8 per cent in both 2016 and 2017, up from 1.5 per cent last year. A number of factors support the expansion, including continued strong monetary stimulus, a competitive exchange rate, the absence of significant fiscal restraint and a persistently lower oil price. The pace of expansion will nevertheless accelerate only slightly due to lack of momentum in the global economy: EUROFRAME expects growth in the US to be only moderate, the gradual deceleration in China to continue and other emerging economies to experience substantial economic difficulties. Unemployment should continue to gradually decline and fall to 9.5 per cent in 2017.

Lower oil prices should benefit the euro area economy and the world economy as a whole, but due to the large international redistribution involved near term risks for the world economy have increased. The drop in the oil price is expected to be largely persistent as it is reflecting a fundamental shift in OPEC policy towards targeting a lower level of prices in order to defend market shares against emerging competition from high cost producers, including US shale oil. According to model calculations, the beneficial effects on growth in growth in oil importing countries should exceed the dampening effect on oil exporters. Due to the magnitude of the terms of trade shift, risks for the stability of the world economy have also increased.

The large number of refugees currently entering into EU countries is expected to lead to substantial additional government expenditures and visibly raise growth in the short term in the most affected countries. The associated fiscal stimulus could be in the range of ½ of a percentage point of GDP in countries like Germany or Finland and the effect on growth only slightly lower. There is, however, the risk that the apparent inability of European countries to agree on a common approach to the problem, increasing signs of disintegration of the Schengen area and the perception of insufficient capacity of societies to acceptably deal with the number of refugees may finally reduce consumer sentiment and weigh on demand.

The EUROFRAME Group comprises ten of the most respected economic forecasting and research institutes in Europe. These are: CASE (Poland), CPB (Netherlands), DIW Berlin (Germany), ESRI (Ireland), ETLA (Finland), IfW (Germany), NIESR (United Kingdom), OFCE France), PROMETEIA (Italy) and WIFO (Austria).

The latest report provides an analysis of the situation in the oil market and the economic effects of lower oil prices and an assessment of the impact of the wave of refugees currently entering the EU on the economic outlook. The report also contains boxes on structural reforms in France and the outlook in Central and Eastern European countries.

Complete forecast

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