EFN Report Winter 2017/18: Economic Outlook for the Euro Area in 2018 and 2019
With advanced economies likely to face over-utilization of economic capacities in 2018 for the first time since the Great Recession, companies will further expand their investment activities. Price and wage dynamics will pick up globally, triggered by the recent increase in energy prices. A major risk for the world economy pertains to financial markets: measures for risk tolareance and valuations for many types of assets have approached levels last reached ten years ago, on the eve of the financial crisis. A sudden readjustment of asset prices and risk premia could worsen financial conditions globally and seriously affect the global economy. The cyclical upswing of the euro area economy continues. The recovery, under way since summer 2013, transformed into an upswing in autumn 2016 when demand from outside the euro area increased quite abruptly; higher exports and improved expectations have contrinuted to induce firms to invest more into equipment. Wage dynamics in the euro area appear to increase, but only slowly. An annual growth rate for hourly wage costs of about 2% is still not enough to put upward pressure on prices, but this will change eventually as the cyclical upswing is likely to continue. Inflation will, according to our forecast, reach the ECB’s target of below but close to 2% in the second half of 2019. Conditions for further healthy growth in the euro area are in place, but employment dynamics might markedly lose momentum in some member countries in the second half of 2018, as the potential labour force is becoming more and more exhausted. Overall, we forecast euro area GDP to grow by 2.2% in 2018 and by 1.5% in 2019.