EU economic growth outlook dims on rising geopolitical risks
The European Union cut its economic growth forecasts for the region, saying rising geopolitical risks in Ukraine and the Middle East and a broader global slowdown have eroded business and consumer confidence since the spring.
The downgraded outlook, released Tuesday, is bad news for the U.S. economy because Europe is a major market for American exports.
“It would be an added head wind,” said Gary Schlossberg, senior economist at Wells Capital Management. “You’d still see economic growth here, but it would be weaker than it would be.”
Europe’s troubles come amid slower economic growth elsewhere in the world, which helped drive up the U.S. trade deficit in September.
The Commerce Department reported Tuesday that U.S. exports dropped by about $3 billion, or 1.5%, to $195.6 billion, from August.
The decrease caused the nation’s trade deficit to rise by 7.6% to $43 billion, the largest gap since May.
Analysts expect that the widening trade deficit will lead federal statisticians to lower U.S. economic growth in the third quarter in an upcoming revision Nov. 25.
“The bottom line is that the third quarter was not as good as it looked on the surface,” Patrick Newport and Michael Montgomery, U.S. economists at IHS Global Insight, said in a research note.
The new trade figures should knock about 0.5 percentage point from the Commerce Department’s initial estimate of a 3.5% annual growth rate for the quarter, they said.
A government report Monday showing that construction spending unexpectedly fell in September for the second straight month also should cause a downward tick in the revised report, taking the quarterly growth down to a 2.9% annual rate, Newport and Montgomery said.
The latest forecast from the Federal Reserve sees the nation’s economic output growing 2% to 2.2% this year and 2.6% to 3% next year.
Such rates would make Europeans envious.
The economy in the 18-nation Eurozone, the area that uses the euro currency, is forecast to expand just 0.8% this year and 1.1% next year, according to the latest estimate from the European Commission, the region’s executive body.
Those figures are down from a spring forecast of 1.2% growth this year and 1.7% next year.
The outlook is better for the broader 28-nation European Union, which includes the United Kingdom, but still was downgraded from the spring.
The EU economy is expected to expand 1.3% this year and 1.5% next year. The spring forecast called for 1.6% growth this year and 2% next year.
“The economic and employment situation is not improving fast enough,” said Jyrki Katainen, the commission’s vice president for jobs, growth, investment and competitiveness.
Europe has had more difficulty than the U.S. in recovering from the Great Recession.
A number of EU nations fell back into recession from 2011 into early 2013, and the region’s economy has struggled to regain strength since then.
In September, the unemployment rate was 11.5% in the Eurozone and 10.1% in the broader European Union. In the U.S., the jobless rate was 5.9% in September.
Tuesday’s report on the European economy said the recovery from that second recession “remains fragile” and that the economic momentum in many member states is “still weak.”
“Confidence is lower than in spring, reflecting increasing geopolitical risks and less favorable world economic prospects,” the report said. “Despite favorable financial conditions, the economic recovery in 2015 will be slow.”
Inflation remains stubbornly low. The report forecast inflation would rise 0.6% this year and 1% next year, well below the 2% annual target of the European Central Bank.
The risk of deflation, or falling prices, in Europe is more worrisome than the region’s economic slowdown because it would limit the ability of competing U.S. companies to raise prices for their goods, Schlossberg said.
Amid the EU’s troubles, the European Central Bank in September cut interest rates and announced new stimulus plans. Tuesday’s report has led to speculation that the bank could take additional steps to boost growth.
Katainen said the European Commission would propose that member nations spend about $376 billion on an investment plan to “kick-start and sustain economic recovery.”
