European Economic Forecast – Winter 2015

Marco Buti, Director General DG ECFIN

EPC Policy Dialogue

Brussels, 24 February 2015

Forecast in a snapshot

2

2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016

Germany 0.1 1.5 1.5 2.0 1.6 0.8 0.1 1.6 5.2 5.0 4.9 4.8

Spain -1.2 1.4 2.3 2.5 1.5 -0.2 -1.0 1.1 26.1 24.3 22.5 20.7

France 0.3 0.4 1.0 1.8 1.0 0.6 0.0 1.0 10.3 10.3 10.4 10.2

Italy -1.9 -0.5 0.6 1.3 1.3 0.2 -0.3 1.5 12.2 12.8 12.8 12.6

P ortugal -1.4 1.0 1.6 1.7 0.4 -0.2 0.1 1.1 16.4 14.2 13.4 12.6

Euro area -0.5 0.8 1.3 1.9 1.4 0.4 -0.1 1.3 12.0 11.6 11.2 10.6

P oland 1.7 3.3 3.2 3.4 0.8 0.1 -0.2 1.4 10.3 9.1 8.8 8.3

United Kingdom 1.7 2.6 2.6 2.4 2.6 1.5 1.0 1.6 7.6 6.3 5.6 5.4

EU 0.0 1.3 1.7 2.1 1.5 0.6 0.2 1.4 10.8 10.2 9.8 9.3

USA 2.2 2.4 3.5 3.2 1.5 1.6 -0.1 2.0 7.4 6.2 5.4 4.9

J apan 1.6 0.4 1.3 1.3 0.4 2.7 0.6 0.9 4.0 3.7 3.7 3.6

China 7.6 7.4 7.1 6.9 2.6 2.3 2.5 3.0 : : : :

Real GDP Inflation Unemployment rate

Very gradual and uneven recovery

Steep fall in oil pricesBrent oil spot prices (USD/€)

3

30

50

70

90

110

130

12 13 14 15

USD/bbl

EUR/bbl

price per bbl

How large is the bonus?

Monetary policy has eased further, and financial fragmentation has receded

4

10-year government bond spreads

Long term inflation expectations

0

6

12

18

24

30

36

0

6

12

18

24

08 09 10 11 12 13 14 15

IT ES PT IE EL (right scale)

(level)

QE effects may surprise on the upside

0

0.5

1

1.5

2

2.5

3

01/12 07/12 01/13 07/13 01/14 07/14 01/15

Inflation expectations 10 years forward 10 years ahead

Inflation expectations 5 years forward 5 years ahead

Inflation expectations 3 years forward 3 years ahead

Inflation expectations 1 year forward 1 year ahead

Euro has depreciated against major peers

5

Euro exchange rates, USD and JPY

Real and nominal effective exchange rate

-6

-4

-2

0

2

4

6

8

LV LT

EE FI SI LU

AT

SK DE

BE

NL PT MT IT FR ES

EL

CY IE

EA

19

NEER

REER

%monthly averages (% change March - December 2014)

90

100

110

120

130

140

150

160

170

180

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

06 07 08 09 10 11 12 13 14 15

USD/EUR (left scale)

JPY/EUR (right scale)(level) (level)

Who will benefit most?

Fiscal stance neutral in aggregate is appropriate

6

Budgetary developments, EU

Composition and distribution not optimal

-7

-6

-5

-4

-3

-2

-1

0

1

2

-7

-6

-5

-4

-3

-2

-1

0

1

2

09 10 11 12 13 14 15 16

General goverment balance (left scale)

Change in structural balance (right scale)

forecast

% of GDP % points

Policy measures and lower oil prices stimulating domestic demand

7

Real GDP growth and its components, EU

-5.5

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

07 08 09 10 11 12 13 14 15 16

Net exports InventoriesInvestment Government consumptionPrivate consumption GDP (year on year % change)

forecast

% points

Though still subdued

Energy prices drive the fall in inflation

8

HICP and sub-components, EU

-1

0

1

2

3

4

5

07 08 09 10 11 12 13 14 15 16

Energy and unprocessed food [% points]

Other components (core inflation) [% points]

HICP, all items

forecast

year on year % change

ECB`s move reduces the risk of a debt-deflationary trap

Unemployment slowly declining, but still high

9

Employment growth and unemployment rate, EU

6

7

8

9

10

11

-0.8-0.6-0.4-0.20.00.20.40.60.81.0

07 08 09 10 11 12 13 14 15 16

Employment (quarter on quarter % change, leftscale), forecast (year on year % change, left scale)Unemployment rate (right scale)

% % of the labour

forecast

Forecast figures are annual data.

Past reforms start to pay off

Current-account rebalancing, still lopsided

10

Current-account balance, EU

"In the long run, we`re all … in surplus". Or are we?

-20

-15

-10

-5

0

5

10

DE

LU

NL

AT FI BE

EA FR IT

MT SI IE SK EE

ES

PT LV

CY LT

EL

2008 2015

% of GDP

Strictness of EPL (regular contracts)

Structural reforms needed to boost growth and facilitate rebalancing

Enhance reform responsiveness across the board

Strictness of EPL (regular contracts)

Risks to the growth outlook:increased in both directions

12

Risks on the downside:• Geopolitical risks• Renewed financial volatility• Delayed implementation of structural reforms• Long period of low inflation

Risks on the upside:• Full effect of QE• Further exchange rate depreciation• Larger impact of low oil prices• Effect of EU action plan on investment

A bi-modal distribution? Economists and (even more) institutions are not good at spotting turning points

Key messages

13

EU determined policy response needed to attain the good equilibrium:

•Very accommodative monetary policy appropriate •Broadly neutral fiscal policy stance: distribution and composition•The Commission’s guidance on the application of the Stability and Growth Pact •The EU Investment Plan: implement in all strands •Structural reforms: step up the gear also in core countries

Thank you for your attention