Regional Economic Outlook: Domestic Expansion Running into External Turbulence
Europe, November 8, 2018
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Bibliographic details
- Published: November 8, 2018
- Series: Europe
Executive Summary
- Economic activity continued to expand in the first half of 2018, albeit at a slower-than-expected pace, mainly in advanced Europe.
- Domestic demand, supported by stronger employment and wages, remains the main engine of growth.
- The external environment has become less supportive and is expected to soften further in 2019 owing to slowing global demand, trade tensions, and higher energy prices.
- Tighter financial conditions in vulnerable emerging market economies and maturing business cycles are also weighing on activity.
- Growth is projected to moderate from 2.8 percent in 2017 to 2.3 percent in 2018 and 1.9 percent in 2019.
- Growth is expected to remain above potential in most countries in the region.
- Risks to the outlook have increased:
- Short-term: escalating trade tensions and a sharp tightening in global financial conditions could undermine investment and weigh on growth.
- Medium-term: delayed fiscal adjustment and structural reforms, demographic challenges, rising inequality, and declining trust in mainstream policies.
- Specific shock: a “no-deal” Brexit would lead to high trade and non-trade barriers between the United Kingdom and the rest of the European Union with negative consequences for growth.
Policy Recommendations (Executive Summary)
- Seize continued above-potential growth to implement structural reforms and rebuild room for fiscal policy.
- Countries with significant vulnerabilities should reduce high levels of public debt and rebuild fiscal buffers to ensure policy space to cope with future shocks.
- Countries with ample fiscal space and stronger-than-warranted external positions should raise public investment to lift potential and promote external rebalancing.
- Monetary policy priorities:
- In emerging Europe, where inflation pressure is generally building, central banks should gradually normalize monetary policy in a well-communicated manner to ensure a smooth adjustment.
- In advanced European economies, where underlying inflation pressures are generally subdued, monetary policy should remain supportive to ensure durable increases in inflation toward targets.
- Structural and financial sector reform priorities remain unchanged from those discussed in previous Regional Economic Outlook reports for Europe.
- Well-targeted macroprudential policies can be useful in addressing specific financial stability risks.
Chapter 1 — Growth and Outlook
- Activity continued to expand in the first half of 2018, but at a slower-than-expected pace, mainly in advanced Europe.
- The external environment has become less supportive, with slowing global demand, escalating trade disputes, and higher fuel prices.
- Tighter financial conditions in vulnerable emerging market economies and maturing business cycles act as additional headwinds.
- With weakening forward-looking indicators, growth is now projected to slow from 2.8 percent in 2017 to 2.3 percent in 2018 and 1.9 percent in 2019, down from respective projections of 2.6 percent and 2.2 percent in the May 2018 Regional Economic Outlook: Europe.
- Near-term risks to the outlook have shifted to the downside.
- As growth is expected to continue to exceed potential, policymakers should continue to focus on structural reforms and rebuilding policy buffers to prepare for the next downturn.
Chapter 2 — Macroprudential Policies (MaPPs)
- The chapter documents the increasing use of macroprudential policies in Europe in recent years to:
- build financial resilience,
- contain general and sectoral credit growth,
- limit house price increases.
- Drawing from case studies, the analysis finds:
- Borrower-side measures, supported by lender-side measures, helped limit the share of riskier mortgages, thereby building resilience.
- Evidence is more mixed as to the ability of MaPPs to contain house price and overall credit growth in the context of monetary policy that remains accommodative and other factors.
International Monetary Fund
Content in this bundle
- Microsoft Word - REO Background Materials.docx
- Eur Reo Ch1
- Eur Reo Ch2
- Executive Summary
- eur-reo-full2
- Streszczenie