Economic outlook, analysis and forecasts

Euro Area - Economic forecast summary (June 2016)

 

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The ongoing moderate recovery is projected to continue, with GDP growth reaching 1.7% in 2017. Sustained monetary stimulus and low oil prices will support domestic demand, but the slowdown in emerging market economies will weigh on exports. As a result, the large external surplus will decrease slightly. The decline in unemployment should also continue at a modest pace, but differences across euro area countries will persist. Continued cyclical slack and some second-round effects from cheaper energy will hold inflation well under the ECB’s target of just below 2%.

Monetary policy should remain accommodative until inflation is clearly rising to the target. Completion of the banking union would improve monetary policy transmission and strengthen confidence. Countries with fiscal space should use fiscal stimulus to support aggregate demand, especially through infrastructure investment. Reforms of tax and spending policies, such as lowering taxes on labour and prioritising growth and equity-friendly spending, will increase jobs and living standards.

Productivity growth has been very sluggish and has tended to become more dispersed across firms, reflecting insufficient diffusion of innovations. Enhanced public support for R&D and more effective adult learning would foster knowledge diffusion. But diffusion also occurs through investment, and better financing conditions are needed to increase dynamism, which requires faster resolution of non-performing loans and insolvencies. Completing the Single Market in network sectors and services is essential to raise productivity growth. Investment would also be strengthened by speeding up the implementation of the Juncker plan.

 

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