The EU Commission’s Spring Forecasts confirm the need for fiscal consolidation, especially next year in Spain and France. Italy not immune from risks, either….
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– In its Spring Economic forecasts, the EU Commission, as expected, has only made slight changes to its macro scenario. Forecast GDP growth in 2015 has been raised from 1.3% to 1.5%, while growth in 2016 is confirmed at 1.9%. This stemmed from a less optimistic assessment of the global GDP trend. Higher than potential growth (estimated at 0.8%) this year is due to the impact of more accommodative monetary conditions (+0.8%, including both the ECB’s measures and the weakening of the exchange rate) and to the oil price shock (+0.5%). By contrast, geopolitical tensions (especially on the Russia-Ukraine front) account for a 0.2% drag on the economic cycle, with a residual component holding back growth by 0.4%, probably explained by the lasting negative effects of the recession, by the deleveraging process, and by lingering uncertainty. Our growth estimates for the euro area are in line with the Commission’s for 2015 (1.5%), and slightly more optimistic for 2016 (2%). The Spring Forecasts have also slightly revised downwards the forecast unemployment rate for the present biennium. Lastly, the Commission has raised its inflation projections by two tenths (the CPI is now forecast at 0.1% in 2015 and 1.5% in 2016).
– The most interesting part is the section on public finance balances (at unchanged policies), which will represent the starting point for the assessment of Stability Programmes. For the euro area as a whole, the estimate of the structural balance has improved by one point tenth both for 2015 and 2016, due to lower interest expenditure. However, the structural balance worsens from -0.8% last year to -0.9% this year, and -1.1% in 2016.
– The most delicate situation – among the main countries – is still Spain’s, despite the progress made in terms of growth (revised upwards by half a point this year, to 2.8%, and by one tenth for next year, to 2.6%). Under current policies, the structural deficit is estimated to worsen to 2.4% in 2015 and to 2.6% in 2016 (from 2% in 2014). As the new rules of the Pact would imply corrections of one fourth of a point this year, and half a point next year, the required year-on-year correction would be a hefty 0.7% of GDP both in 2015 and 2016. As the elections lie ahead, we think this goal is unlikely to be achieved. Also, the estimates of the structural balance included by the government in its Stability Programme are very distant from the Commission’s (-0.9% in 2014, and improving to -0.6% in 2016).
– France’s position is also in a “controversial” position. IN this case, growth estimates have not been significantly revised (up by one tenth in 2015, to 1.1%, and down to 1.7% in 2016). While better than in previous estimates, year-on-year public finance forecasts remain off-target: a half-point reduction of the structural deficit (already include in the Stability Pact, and therefore not officially “objected to” by the government, but still to be implemented) would require for France an additional year-on-year correction of 0.2% this year and 0.5% the next.
– For what concerns Italy, the Commission essentially confirmed its growth estimates (to 0.6% in 2015 and 1.4% in 2016, from 1.3% previously). Public finance projections are also broadly unchanged (deficit of 2.6% this year and 2% next year; deficit structural of 0.7% and 0.8%). The improvement in the year-on-year structural balance expected by the Commission (0.2%) is broadly in line with the rules of the Pact (0.25%) this year; however, the rate is expected to worsen next year by one tenth, as opposed to a 0.5% correction required by the Pact (in its Stability Pact the government has only “offered” a 0.1% correction). Therefore, negotiations with Brussels could be in order on the size of required fiscal consolidation in 2016 (crunch time will come in the autumn, with the Stability Law). Also, this year’s accounts could be impacted by the recent ruling of the Constitutional Court on failure to adjust pension payments in 2012-13, which will cost 8-9 billion euros in total starting in 2012 (three billion a year from 2015, i.e. 0.2% of GDP). In other words, Italy may also have to open several negotiation tables with Brussels.
Appendix
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