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EU Faces Growth Hurdles
World Economy

EU Faces Growth Hurdles

The European Union’s economic recovery is gaining strength, but the pace of growth continues to be modest, despite accommodative monetary policy and favorable financial conditions, and investment remains subdued, says the new World Bank EU Regular Economic Report, a biannual publication that covers economic developments, prospects, and economic policies in the EU.
“The EU is gradually emerging from a protracted economic downturn that led to an increase in poverty in many countries. Continued easing of financial conditions, improved confidence, low commodity prices and a reduced drag from fiscal consolidation will continue to support growth in 2015 and 2016,” said Theo Thomas, World Bank Lead Economist and co-author of the report. “However, a prolonged period of low investment growth, a slowdown in emerging-market growth, higher financial volatility and regional tensions could undermine the outlook”.
Private consumption is the main driver of the EU recovery. Growing wages and employment, bolstered by low consumer-price inflation largely due to subdued commodity prices, have raised household incomes and spending. Youth unemployment is also declining, but remains elevated in some countries, especially in Central and Southern Europe, where further support may be required to provide education and training to ensure they have marketable skills.
However, as investors remain concerned about the strength of the recovery, and households and corporations continued to pay down debts, investment remains the weak link to a more vigorous and sustained recovery.

 Poverty Rate Declines
The recovery is leading to a decline in poverty rates, which surged across the EU during the crisis despite significant social protection systems. While EU countries are among the biggest spenders on social protection in the world, some EU countries have been unable to provide effective protection for their poorest citizens through poverty-targeted programs. Some countries, especially in Southern and Central Europe, saw cuts in social assistance spending during the crisis. Reforms for making social protection systems more effective in supporting the poor include the introduction of guaranteed minimum income programs, maintaining the effective coverage and adequacy of existing social exclusion programs, and reducing the leakages of social assistance transfers to the rich.

 Reducing Rigidities
“The EU needs to turn current tailwinds into self-sustaining growth through continued structural reform,” continued Thomas. “Continuing to remove constraints on businesses, by reducing rigidities in labor and product markets, and ensuring labor has the right skills through investing in education and training are likely to raise the EU’s long-term growth potential. In this context, focusing social assistance systems on the poorest and most vulnerable groups, while ensuring that spending is affordable over the long-term, could continue to reduce poverty.”
The World Bank expects growth in the EU to reach 2% in 2015 and 2.1% in 2016. It projects that growth will strengthen from 1.8% (y-o-y) in the first half of 2015, with Central Europe experiencing the highest growth, driven by the Czech Republic, Poland and Romania. Romania is expected to grow at 3.6% in 2015, and 3.9% in 2016, fueled by a surge in private consumption and supported by fiscal measures. Poland is projected to reach 3.5% in 2015 and remain above this level over the medium term, as improved labor market conditions raise real disposable household incomes and consumption.
Southern Europe’s growth rates, at 1.4% in 2015 and 1.6% in 2016, are likely to be the slowest, but a significant improvement from less than 0.5% in 2014.
In Croatia, economic activity is expected to increase by 1.5% in 2015, with recovery continuing in 2016-17 at on average 1.9%. The recovery is led by strengthening domestic demand, exports and investment while unemployment continues to gradually decline.
However, external factors, like a slowdown in Croatia’s main trading partners, the Fed’s tightening monetary policy and a surge in emerging market risk premium, could undermine Croatia’s fragile recovery, affecting exports and raising financing costs for an already high level of indebtedness of public sectors as well as other domestic sectors.

 

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