## Executive Summary

## Source details

**Canonical URL:** [Executive Summary](https://www.imf.org/-/media/files/publications/reo/eur/2018/may/eur-exec.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/reo/eur/2018/may/eur-exec.pdf.md)
- [Structured JSON version](/-/media/files/publications/reo/eur/2018/may/eur-exec.pdf.json)

---

### Growth outlook and recent performance
- Real GDP increased by 2.8 percent in 2017, up from 1.8 percent in 2016.
- The expansion is largely driven by domestic demand.
- Credit growth has finally picked up, which is helping Europe’s banks rebuild profitability.
- Leading indicators have recently begun to ease, but they remain at high levels.
- Forecast: growth to stay strong, reaching 2.6 percent in 2018 and declining to 2.2 percent in 2019.
- In central and eastern Europe, economies are cyclically much further ahead; wages are growing rapidly and inflation is expected to pick up appreciably in 2018, potentially affecting competitiveness.

### Inflation, wages, and labor markets
- Inflation and wage growth remain subdued in most advanced economies and are projected to gather pace only very gradually, given slack in labor markets.
- Subdued wage dynamics in many advanced economies reflect:
  - low inflation and inflation expectations,
  - still-high unemployment and underemployment rates,
  - sluggish productivity growth.
- There are signs that wage Phillips curves are very flat in advanced economies.
- Spillovers from regional labor market conditions and slow wage growth in some economies are contributing to wage moderation, holding back demand in other economies.
- It could take some time before wage growth picks up noticeably and broadly in the advanced economies.

### Risks to the outlook
- The favorable outlook is subject to several risks that are mainly to the downside over the medium term.
- Most immediate risks stem from:
  - rich valuations in financial markets at the global level, notably an exceptionally low term premium,
  - a growing tendency toward inward-looking economic policies.
- Sustained large declines in stock prices are often harbingers of lower growth and inflation.
- With many policy rates close to the zero lower bound and central banks still engaged in unorthodox policies, the scope for further, effective policy easing in response to new shocks is not large.
- It is therefore all the more important to rebuild room for fiscal policy maneuver.

### Output gaps, unemployment, and investment
- Estimates for output gaps point to little slack in most economies.
- Unemployment rates—especially when defined broadly—still appear high, particularly in key advanced economies.
- Whether the recovery has the legs to last depends on the response of investment.
- Chapter 1 shows that investment has generally been subdued, and mainly for replacement purposes.
- Investment has also been much weaker than after the global crisis of 1991.

### Fiscal and monetary policy recommendations
- Policymakers should seize the moment to rebuild room for fiscal maneuver and push forward with reforms to boost growth potential.
- In countries where inflation is still subdued, monetary policy should continue to be supportive to ensure a durable increase in inflation to targets.
- In countries where inflation is hitting targets, monetary policy should gradually normalize.
- In many economies, policymakers should strive to bring fiscal deficits within range of balance over the next few years so that automatic stabilizers and fiscal stimulus can be deployed again, should downside risks materialize.
- Stabilizing and bringing down public debt would help economies better cope with the pressures from growing expenditures on pensions and health care.
- Fiscal adjustment should be driven first and foremost by efforts to improve the efficiency of government.
- Countries with ample fiscal space can and should use it to promote higher potential growth.

### External balances and structural priorities
- The combination of fiscal adjustment and easy monetary policy should also help the many economies that have rebuilt much-needed competitiveness since the crisis continue to lower their still-high net external liability positions.
- Improving institutions and governance is a major challenge, particularly in many of the emerging economies in Europe that also need to work further on these areas.

### Deeper Economic and Monetary Union (EMU)
- The recovery provides an opportunity to move faster to deepen the Economic and Monetary Union.
- Priority actions include:
  - More actions to complete the Banking Union. Instituting a European Stability Mechanism to backstop the Single Resolution Fund would mark an important first step toward greater risk sharing.
  - A strong case for a central fiscal capacity, with access strictly conditional on compliance with the fiscal rules combined with mechanisms to prevent permanent transfers between countries.
  - With the United Kingdom leaving the single market, a more urgent need to advance the Capital Markets Union, which requires steps to promote harmonization of insolvency regimes and better protection of cross-border investor rights.

*Source: Regional Economic Outlook: Europe — Executive Summary*

---


_Source: https://www.imf.org/-/media/files/publications/reo/eur/2018/may/eur-exec.pdf_