Europe’s Economic Outlook
IMF Blog, April 11, 2014
Source details
- Canonical URL
- Europe’s Economic Outlook
Other formats
Bibliographic details
- Authors: Reza Moghadam
- Published: April 11, 2014
Economic growth
- Economic growth across Europe is slowly picking up.
- The recovery is still modest; measures to boost economic growth and create jobs are important.
Western Europe: picking up the pace
- The recovery projected last October for the euro area has solidified.
- Revised forecasts: the 2014 forecast for the euro area is up from 1 percent last October to 1.2 percent now.
- Important upgrades in countries like Spain.
- Revisions reflect:
- stronger data flow on the back of past policy actions,
- the revival of investor confidence,
- the waning drag from fiscal consolidation.
- Positive impact on program countries: improving economies, lower spreads, and evidence of market access.
- UK growth: almost 3 percent is expected for 2014.
- Remaining headwinds in the euro area:
- debt overhangs in firms and households,
- fragmented financial markets,
- policy uncertainty.
- Banking Union steps highlighted as important:
- the single supervisor,
- the asset quality review,
- stress tests — important to ensuring the adequacy of bank capital and market confidence.
- Concern about “lowflation”: a large and persistent undershoot relative to the ECB’s medium-term inflation target of 2 percent.
- Persistently low inflation puts pressure on debtors, real lending rates, relative price adjustment and jobs.
- The ECB is paying attention and is considering further action, including unconventional policies within its mandate.
- Structural reforms emphasized for reviving longer-term growth after several years of under-investment and unemployment.
- Referenced book: Jobs and Growth: Supporting the European Recovery.
- Three medium-term priorities from the book:
- reducing high levels of public and private debt;
- implementing product and labor market reforms;
- taking advantage of new growth opportunities through innovation and further integration into global supply chains.
Emerging Europe: strengthening policies
- Growth in most of Central, Eastern and Southeastern Europe is recovering in the wake of euro area recovery.
- Region-wide growth will be held back — marked down since last October — by:
- the expected contraction in Ukraine,
- slowdowns in Russia and Turkey.
- External funding conditions have become more challenging.
- Capital flows into the region had started to reverse, with portfolio flows turning negative in late 2013.
- This comes on top of ongoing bank deleveraging the region has faced.
- Near-term effect: these forces will offset—perhaps even more than offset—the tailwind from Euro Area recovery.
- Countries with stronger policy frameworks and fundamentals have been less hurt by the reversal in capital flows.
- Policy guidance:
- those with exchange rate and monetary policy flexibility should continue to use it as the first line of defense against volatility;
- all countries, especially those with weaker fundamentals, need to address legacy issues and problems exposed by the crisis:
- structural weaknesses that hold back growth and keep unemployment high;
- non-performing loans that hamstring credit;
- exhausted fiscal buffers.
Ukraine
- Ukraine faces a confluence of a geo-political crisis and an economic one.
- Authorities are taking unprecedented action to tackle immediate and chronic problems, including actions to:
- ensure exchange rate flexibility and competitiveness;
- stabilize the financial system and confidence in banks;
- gradually reduce the fiscal deficit;
- adjust energy prices from far-below-world levels (with safeguards for the poor);
- implement wider reforms to tackle corruption, governance and the business climate.
- Remaining tasks: finalize some actions and ensure that the program is financed.
- If all goes well, expectation is that the IMF Board will consider the program in late April/early May.
Source: Europe’s Economic Outlook — Reza Moghadam, April 11, 2014.