Regional Economic Outlook: Europe

Europe, November 6, 2019

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Regional Economic Outlook: Europe

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Bibliographic details

• Published: November 6, 2019
• Series: Europe

Economic outlook and recent developments

• Economic activity in Europe has slowed on the back of weakness in trade and manufacturing; for most of the region, the slowdown remains externally driven.
• Services and domestic consumption have been buoyant but are tightly linked to labor market conditions, which, despite some easing, remain robust.
• Expansionary fiscal policy in many countries and looser financial conditions have supported domestic demand.
• Growth projections:
  • 2018 growth: 2.3 percent
  • 2019 projected growth: 1.4 percent (decline from 2.3 percent in 2018)
  • 2020 projected growth: 1.8 percent (modest recovery as global trade is expected to pick up and some economies recover from past stresses)
  • The 2019 projection represents the lowest growth rate since 2013.
• Regional revisions (2019):
  • Advanced Europe growth revised down by 0.1 percentage point to 1.3 percent.
  • Emerging Europe growth revised up by 0.5 percentage point to 1.8 percent.

Downside risks and scenarios

• Key near-term risk: a no-deal Brexit, which could have a sizeable negative impact on economies in the region.
• Other downside risks:
  • Intensification of trade tensions and related uncertainty, dampening investment.
  • Weakness in trade and manufacturing spreading to other sectors—notably services—faster and to a greater extent than currently envisaged.
  • Abrupt declines in risk appetite and financial vulnerabilities.
  • Re-emergence of deflationary pressures in advanced economies.
  • Geopolitical risks.
• Given elevated downside risks and limited scope for monetary policy action, contingency plans should be at the ready; a synchronized fiscal response could become suitable if risks materialize, albeit appropriately differentiated across countries.

Monetary policy, inflation, and financial stability

• Subdued inflationary pressures and slowing economic activity in many European countries call for monetary policy to remain accommodative.
• Extending loose monetary policy for longer calls for heightened monitoring of financial sector vulnerabilities—such as rising house prices—and active use of macroprudential measures as needed.

Fiscal policy guidance and structural reforms

• With unemployment rates projected to remain close to or below levels reached during the pre-crisis boom, fiscal stances should generally remain guided by medium-term objectives.
• Overall fiscal balances should be allowed to absorb cyclical fluctuations in activity.
• Policy prescriptions:
  • Countries with ample fiscal space should take measures to boost potential output.
  • Countries with elevated debt and deficit levels should generally proceed with fiscal consolidation.
  • Contingency plans for stimulus should be ready in case of a sharper downturn.
  • Reinvigorating structural reforms remains vital to raise potential output and address long-term challenges, including:
  • Raising labor force participation.
  • Enhancing human capital and infrastructure.
  • Strengthening governance.

Wages, inflation, and passthrough (Chapter 2 findings)

• Observation: Wages have been rising faster than productivity in many European countries, yet underlying consumer price pressures remain limited.
• Key findings:
  • Historically, wage growth has been an important determinant of price developments in Europe; wage growth leads to higher inflation.
  • The impact of wage growth on inflation has weakened since 2009.
  • The wage-to-price passthrough is significantly lower when:
  • Inflation expectations are subdued.
  • Firms face greater competitive pressures.
  • Corporate profitability is robust.
• Implication: The recent pickup in wage growth is likely to have a more muted impact on inflation than in the past.

Regional Economic Outlook: Europe, November 2019

Content in this bundle

• Executive Summary
  • Executive Summary (Markdown version)
  • Executive Summary (PDF)
• Chapter 1
  • Chapter 1 (Markdown version)
  • Chapter 1 (PDF)
• Chapter 2
  • Chapter 2 (Markdown version)
  • Chapter 2 (PDF)
• Executive Summary
  • Executive Summary (Markdown version)
  • Executive Summary (PDF)
• Online Annex 2.1 Empirical Methodologies Using Aggregate Data
  • Online Annex 2.1 Empirical Methodologies Using Aggregate Data (Markdown version)
  • Online Annex 2.1 Empirical Methodologies Using Aggregate Data (PDF)
• The European Regional Economic Outlook in the Global Context
  • The European Regional Economic Outlook in the Global Context (Markdown version)
  • The European Regional Economic Outlook in the Global Context (PDF)
• Full Report
  • Full Report (Markdown version)
  • Full Report (PDF)

References

• https://www.imf.org/en/News/Articles/2019/11/05/na110619-europe-facing-spillovers-from-trade-and-manufacturing
• Europe’s Wage-Price Puzzle
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