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Higher wages to pass through to inflation says European Commission

14 Feb 2020 / business Print

Higher wages to pass through to inflation says European Commission

The European Commission predicts that Ireland’s GDP will grow by 3.6% this year and by 3.2% in 2021.

Only two countries are forecast to see faster growth in 2020: Malta (4%) and Romania (3.8%). On average, GDP is expected to grow by 1.4% in the EU and by 1.2% in the Euro Area in 2020 and 2021.

The forecast for Ireland also estimates real GDP to have grown by 5.7% in 2019, the fastest rate in the EU.

It states that activities by multinationals remain difficult to predict and could drive headline growth in either direction.

Moderate growth

The Winter 2020 Interim Economic Forecast, published this week projects that the European economy is set to continue on a path of steady, moderate growth.

The euro area has now enjoyed its longest period of sustained growth since the euro was introduced in 1999.

For the EU as a whole, growth is forecast to ease marginally to 1.4% in 2020 and 2021, down from 1.5% in 2019.


Paolo Gentiloni, European Commissioner for the Economy, said: “The outlook for Europe's economy is for stable, albeit subdued growth over the coming two years.

"This will prolong the longest period of expansion since the launch of the euro in 1999, with corresponding good news on the jobs front.

"We have also seen encouraging developments in terms of reduced trade tensions and the avoidance of a no-deal Brexit. But we still face significant policy uncertainty, which casts a shadow over manufacturing. As for the coronavirus, it is too soon to evaluate the extent of its negative economic impact.”

Public investment, especially in transport and digital infrastructure, is expected to increase significantly in a number of member states.

Together with tentative signs of stabilisation in the manufacturing sector, and a possible bottoming out of the decline in global trade flows, this should allow the European economy to continue expanding, the Commission believes.

The forecast for inflation in the euro area has been raised to 1.3% in 2020 and 1.4% in 2021, an increase of 0.1 percentage points for both years compared to the autumn 2019 forecast.

Tentative signs

This reflects tentative signs that higher wages may start passing through to core prices and slightly higher assumptions about oil prices.

In the EU, the forecast for inflation in 2020 has also been raised by 0.1 percentage points to 1.5%.

The forecast for 2021 remains unchanged at 1.6%.While some downside risks have faded, new ones have emerged. Overall the balance of risks continues to remain tilted to the downside.

Downside risks

The ‘Phase One' trade deal between the US and China has helped to reduce downside risks to some extent, but the high degree of uncertainty surrounding US trade policy remains a barrier to a more widespread recovery in business sentiment.

Social unrest in Latin America risks derailing the region's economic recovery. Heightened geopolitical tensions in the Middle East have raised the risk of conflict in the region.

While there is now clarity on trading relations between the EU and the United Kingdom during the transition period, there remains considerable uncertainty over the future partnership with the UK.

Public health

The outbreak of coronavirus, with its implications for public health, economic activity and trade, especially in China, is a new downside risk.

The European economy could benefit from more expansionary and growth-friendly fiscal policies and enjoy positive spill-overs from more benign financing conditions in some euro area member states.


Gazette Desk
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