European Union reduces growth forecasts for 2019 and 2020

BRUSSELS–Europe‘s economy is settling into a pattern of "subdued" expansion as global trade tensions weigh on the export-oriented bloc, the European Union said Thursday, slashing growth expectations and calling for more stimulus.

Gross domestic product in the 19-member eurozone will grow by 1.1% in 2019, the EU said in its quarterly report, cutting its 1.2% forecast from July. The expansion rate is seen rising to 1.2% next year, down from 1.4% previously expected, and remain at 1.2% in 2021.

The EU‘s economic outlook is deteriorating as the U.S.-China trade war saps global growth. That in turn is dampening investments and manufacturing in Europe, where domestic demand isn‘t strong enough to drive robust economic expansion.

Meanwhile, EU policy makers are at loggerheads over how to revive the stagnating eurozone economy. The European Central Bank‘s new president, Christine Lagarde, is looking to bridge divides over ultraloose monetary policies to revamp growth. She has also joined other EU officials to call on eurozone members with low debt levels and budget surpluses, including Germany and the Netherlands, to boost public spending and stimulate the economy.

"The challenging road ahead leaves no room for complacency," said Pierre Moscovici, EU commissioner for economic and financial affairs, taxation and customs. "All policy levers will need to be used to strengthen Europe‘s resilience and support growth."

Eurozone growth could be further hampered by a sharper-than-expected slowdown in China‘s economy, as Beijing tries to cushion the blows from its trade spat with the U.S., the EU said.

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A no-deal Brexit would also exacerbate weaknesses in the manufacturing sector and further erode domestically oriented industries‘ performance, according to the EU.

With forecasts pointing to further lowering of the inflation rate, the ECB‘s outgoing president, Mario Draghi, restarted in September the bank‘s bond purchases. The EU slashed its forecast for annual consumer-price increases to 1.2% for 2019 from 1.3% previously and said that the inflation rate would be unchanged next year. It will inch up to 1.3% in 2021, the EU said, remaining well below the ECB target of just under 2%.

Despite slowing economic growth, the EU expects unemployment to continue its decline to 7.6% by yearend, compared with a May forecast of 7.7%. The unemployment rate is seen dropping to 7.4% next year and 7.3% in 2021.

As governments slash debt, the eurozone deficit will be at 0.8% at the end of the year, the EU said, compared to its earlier forecast of 0.9%. The monetary union‘s deficit is expected to slightly expand to 0.9% next year and to 1% in 2021. That, according to EU officials, leaves room for action.

"I urge all EU countries with high levels of public debt to pursue prudent fiscal policies and put their debt levels on a downward path," said Valdis Dombrovskis, the EU vice-president in charge of financial stability and the bloc‘s capital markets union. "On the other hand, those member states that have fiscal space should use it now."

Write to Emre Peker at emre.peker

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