Europe Economic Condition : A Brief Summary

Economy Condition

The European recovery is strengthening and broadening appreciably. Real GDP growth is projected at 2.4 percent in 2017, up from 1.7 percent in 2016, before easing to 2.1 percent in 2018. These are large upward revisions—0.5 and 0.2 percentage point for 2017 and 2018, respectively—relative to the April World Economic Outlook.The 19-nation euro-zone bloc is already enjoying the strongest growth in a decade and now economists at Credit Suisse Group AG and Oxford Economics are declaring that it’s heading toward a golden period of low-inflationary expansion.The European recovery is spilling over to the rest of the world,contributing significantly to global growth. In a few advanced and many emerging economies, unemployment rates have returned to pre-crisis levels. Most emerging market European economies are now seeing robust wage growth. In many parts of Europe, however, wage growth is sluggish despite falling unemployment.Risks appear more balanced over the near term, but are still tilted to the downside over the medium term. The recovery may be stronger than projected in the short run. But the sustainability of the rebound remains in question. Over the longer term, adverse demographic trends and subdued productivity are likely to hold back growth. The outlook is also subject to several important domestic and externaldownside risks. Policymakers should take advantage of the improved prospects to rebuild fiscal buffers and enhance the economy’s capacity to grow and absorb shocks. Many advanced and market emerging economies need to reduce still-elevated fiscal deficits in a growth-friendly way. This task is particularly important for those with high public debt, as interest rates will likely rise over time. For countries with stronger fiscal positions, available space should be used to lift growth potential and support structural reforms. For now, monetary policy can stay accommodative in most of Europe, given subdued inflation pressures. But where wages have accelerated, central banks should be ready to gradually withdraw stimulus to keep inflation expectations firmly anchored.

Structural policies need to reinvigorate convergence, which has slowed since the crisis, and increase growth potential. Priorities differ across countries. For many advanced economies, faster progress on structural reforms is needed to raise productivity growth, for example, by making product markets more competitive and improving labor markets as well as education and training. Regarding crisis legacies, cleaning up the balance sheets of weak banks remains a priority. More needs to be done to strengthen the European Union, notably the resilience of the euro area to shocks. This requires completing the banking and capital markets unions and building a euro area fiscal capacity to provide a macroeconomic stabilization mechanism. In parallel, action is needed to resolve banking sector legacies and strictly implement the common fiscal rules.

In emerging market economies, the business environment should be further improved. After a period of rapid catch-up, countries in the region have generally  seen a significant slowdown in convergence with their more advanced peers in Europe. To reaccelerate convergence, the focus should be on the next generation of reforms, especially reforms of institutions and governance. 
source: IMF report (Nov 2017)