EU cuts UK growth forecast as eurozone motors ahead

Brussels’ health check of member states sharply cuts UK forecast to 1.5% as eurozone enjoys best year since financial crisis of 2007.

The European commission enters key Brexit talks with the government with the eurozone economy in its best shape for a decade and activity in the UK weaker than expected six months ago.

In its half-yearly health check, the commission sharply cut its forecast for UK growth this year and said it was likely to continue struggling in 2018 and 2019 even on the assumption that trade would not be disrupted by its departure from the EU.

Forecasts produced by economists in Brussels said the UK economy would grow by 1.5% this year rather than the 1.8% pencilled in when the last assessment was made in May. The International Monetary Fund is expecting UK growth of 1.7% this year, while the Organisation for Economic Cooperation and Development is forecasting growth of 1.6%.

Brussels believes that the UK economy will slow further to 1.3% in 2018 and 1.1% in 2019 – with growth of just 0.3% in every quarter for the next two years. It is gloomier about the outlook than the Bank of England, which expects growth of 1.7% in both years.

“Economic growth in the UK has been slowing since the start of the year, as higher consumer prices constrained private consumption growth,” the commission report said. “Based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK, growth is still expected to remain subdued over the forecast horizon.

“Consumption growth is projected to be modest, in line with weak real wage growth, while uncertainty continues to weigh on business investment. However, net exports are expected to provide some support to growth, and the labour market is projected to show continued resilience.”

The weakening outlook for the UK contrasts with the commission’s growth upgrade for the eurozone. Helped by a pick up in the world economy and by the stimulus provided by the European Central Bank, the eurozone is expected to expand by 2.2% this year, up from 1.7% six months ago.

Of the four big eurozone economies, Spain is expected to grow by 3.1% in 2017, Germany by 2.2%, France by 1.6% and Italy by 1.5%. For the eurozone as a whole, the pace of growth is expected to slacken slightly to 2.1% in 2018.

The commission said the eurozone had enjoyed its best year since the start of the financial crisis a decade ago, having shaken off the debt crisis that gripped the region a couple of years ago. “The European economy has performed significantly better than expected this year, propelled by resilient private consumption, stronger growth around the world, and falling unemployment.

“Investment is also picking up amid favourable financing conditions and considerably brightened economic sentiment as uncertainty has faded.”

Despite the pick up in growth, Europe’s unemployment rate is expected to be 8.5% next year – double the rate in the UK.

Pierre Moscovici, the EU commissioner for economic and financial affairs, said: “We have entered a new phase of the economic recovery, with stronger growth driven by resilient consumption, the global upswing, loose financing conditions and falling unemployment.”