Economic growth in the 19-member euro area is expected to slow down in the coming years, the European Commission said Thursday.
Gross domestic product (GDP) in the region is seen growing at a pace of 2.1 percent this year, after hitting a 10-year peak at the end of 2017. Furthermore, growth is expected to slow down to 1.9 percent and 1.7 percent in 2019 and 2020, respectively.
“There is a high degree of uncertainty surrounding the forecast and there are many interconnected downside risks. The materialization of any of these risks could amplify the others and magnify their impact,” the European Commission said in its fall 2018 economic forecasts report.
In particular, the European Commission is concerned about a potential overheating in the U.S. (which happens when an economy is growing at an unsustainable pace), and a consequent increase in interest rates — which could bring problems for European companies that trade heavily with the U.S. as well as for European banks.
Brussels is also worried over an escalation in trade tensions between the U.S. and China.
Internally, apart from Brexit, the European Commission said that doubts over the quality of the finances in certain countries could also shake the banking sector and economic activity.
Italy is at a ‘crossroads’
The European Commission and Italy have been arguing over Rome’s spending plans for next year, after the anti-establishment government decided to increase public spending in the coming years.
In its plans for 2019, Rome said that it will increase public deficit to 2.4 percent of GDP — three times higher than what the previous government had promised. However, taking into account all the new policies that Rome wants to put forward, the European Commission said that Italy’s 2019 deficit will in fact be 2.9 percent — close to the EU’s threshold of 3 percent.
In 2020, the government deficit is projected to reach 3.1 percent of GDP, the commission said, warning that risks related to market reactions could potentially worsen the forecast.
Italian bond yields have risen mostly since May after two populist parties joined forces and formed a new government. Both the right-wing Lega and the leftist Five Star Movement want to deliver with key campaign pledges, such as a relaxation in taxes and previously-planned pension cuts.
The European Commission has disagreed with Rome’s spending plans for the coming years and asked the country to submit a new draft budget by November 13th. So far, government ministers have said they will not change their economic plans.