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Spring 2018 EU Economic Forecast: Expansion to continue amid new risks

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Growth rates for the EU and the euro area beat expectations in 2017 to reach a 10-year high at 2.4%. Growth is set to remain strong in 2018 and ease only slightly in 2019, with growth of 2.3% and 2.0% respectively in both the EU and the euro area.

Private consumption remains strong, while exports and investment have increased. Unemployment continues to fall and is now around pre-crisis levels. However, the economy is more exposed to external risk factors, which have strengthened and become more negative.

Robust growth is facilitating a further reduction in government deficit and debt levels and an improvement in labour market conditions. The aggregate deficit for the euro area is now less than 1% of GDP and is forecast to fall under 3% in all euro area Member States this year.

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said:”The economic expansion in Europe is set to continue at a solid pace this year and next, supporting further job creation. However, we also see increased risks on the horizon. This is why we should use the current good times to make our economies more resilient. This means building fiscal buffers, reforming our economies to foster productivity and investment, and making our growth model more inclusive. It also means strengthening the foundations of our Economic and Monetary Union.”

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Europe continues to enjoy robust growth, which has helped drive unemployment to a ten-year low. Investment is rising and public finances are improving, with the deficit in the euro area set to drop to just 0.7% of GDP this year. The biggest risk to this rosy outlook is protectionism, which must not become the new normal: that would only hurt those of our citizens we most need to protect.”

Growth to remain strong, but pace to ease slightly

In 2017, real GDP growth reached 2.4% in the EU and in the euro area as the economy moved into higher gear. Growth was supported by high consumer and business confidence, stronger global growth, low financing costs, healthier private sector balance sheets and brighter labour market conditions. While short-term indicators suggest a cooling of activity in early 2018, this looks likely to be partly temporary.

The pace of growth is expected to remain robust on the back of sustained consumption and strong exports and investment. Both the EU and the euro area are forecast to grow by 2.3% this year. Growth in both areas is projected to ease to 2.0% in 2019 as bottlenecks become more apparent in some countries and sectors, monetary policy is adjusted to circumstances and global trade growth calms somewhat.

With employment at a record high, some labour markets are getting tight

Unemployment continues to fall and is now around pre-crisis levels. In the EU, unemployment is set to continue to decline, from 7.6% in 2017 to 7.1% in 2018 and 6.7% in 2019. Unemployment in the euro area is forecast to fall from 9.1% in 2017 to 8.4% in 2018 and 7.9% in 2019.

The number of people in work in the euro area is now at its highest since the introduction of the euro, but some labour-market slack remains in the euro area. While in certain Member States unemployment is still high, in others, job vacancies are already getting harder to fill.

Inflation to rise slowly, as underlying pressures strengthen

Consumer price inflation weakened in the first quarter of this year, but is expected to pick up slightly in the coming quarters, partly due to oil prices that have recently increased. Underlying price pressures are also building as a result of tighter labour markets and faster wage growth in many Member States. Overall, inflation in the euro area is forecast to remain the same in 2018 as in 2017 at 1.5% and then rise to 1.6% in 2019. In the EU, the same pattern is expected, but with inflation forecast to continue at 1.7% this year before rising to 1.8% in 2019.

Public finances improving, with no deficits over 3% of GDP

The aggregate euro area government budget deficit and public debt both fell as percentages of GDP in 2017, helped by strong economic growth and low interest rates. With Member States’ budgets benefitting from the effects of improving labour market conditions, including through lower social benefit payments, 2018 is set to be the first year since the start of the Economic and Monetary Union in which all governments manage budget deficits of less than 3% of GDP, as referred to in the Treaty.

The aggregate general government deficit of the euro area is now forecast to fall to 0.7% of GDP in 2018 and 0.6% in 2019. In the EU, the aggregate deficit is forecast to be at 0.8% in 2018 and 2019. The euro area’s debt-to-GDP ratio is forecast to fall to 84.1% in 2019, with declines projected for almost all Member States.

Risks to the outlook have increased and become more negative

Overall, the risks to the forecast have risen and are now tilted to the downside. In Europe, recent indicators have reduced the likelihood that growth in Europe might turn out stronger than expected in the near term. Externally, the financial market volatility experienced in recent months is likely to become a more permanent feature in the future, which will add to uncertainty. Pro-cyclical fiscal stimulus in the US is expected to boost short-term growth, but to raise the risk of overheating and the possibility that US interest rates rise faster than currently assumed. Also, an escalation of trade protectionism presents an unambiguously negative risk to the global economic outlook. These risks are interrelated. Due to its openness, the euro area would be particularly vulnerable to their materialisation.

For the United Kingdom, a purely technical assumption for 2019

To allow for a comparison over time, the projections for the EU for 2019 contained in the forecast consist of projections for all 28 Member States, including the United Kingdom.

Given the ongoing negotiations on the terms of the United Kingdom’s withdrawal from the EU, the Commission’s projections for the time after Brexit are based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK. This is for forecasting purposes only and has no bearing on the talks underway in the context of the Article 50 process.

Background

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 23 April. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 23 April. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.

This year, the European Commission has reverted to publishing two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) each year, instead of the three comprehensive forecasts in winter, spring and autumn that it has produced each year since 2012. The interim forecasts cover annual and quarterly GDP and inflation for the current year and following years for all Member States and the euro area, as well as EU aggregates. This change is a return to the Commission’s previous pattern of forecasts and brings the Commission’s forecast schedule back into line with those of other institutions (e.g. the European Central Bank, International Monetary Fund, Organisation for Economic Co-operation and Development).

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Companies may be overlooking the riskiest cyber threats of all

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A majority of companies don’t have a handle on their third-party cyber risks  – risks obscured by the complexity of their business relationships and vendor/supplier networks.  This is the finding of the PwC 2022 Global Digital Trust Insights Survey.  The survey of 3,600 CEOs and other C-suite executives globally found that 60% have less than a thorough understanding of the risk of data breaches through third parties, while 20% have little or no understanding at all of these risks.

The findings are a red flag in an environment where 60% of the C-suite respondents anticipate an increase in cyber crime in 2022. They also reflect the challenges organizations face in building trust in their data — making sure it is accurate, verified and secure, so customers and other stakeholders can trust that their information will be protected.

Notably, 56% of respondents say their organizations expect a rise in breaches via their software supply chain, yet only 34% have formally assessed their enterprise’s exposure to this risk. Similarly, 58% expect a jump in attacks on their cloud services, but only 37% profess to have an understanding of cloud risks based on formal assessments.

Sean Joyce, Global & US Cybersecurity & Privacy Leader, PwC United States said: “Organizations can be vulnerable to an attack even when their own cyber defenses are good; a sophisticated attacker searches for the weakest link – sometimes through the organization’s suppliers.  Gaining visibility and managing your organization’s web of third-party relationships and dependencies is a must.  Yet, in our research, fewer than half of respondents say they have responded to the escalating threats that complex business ecosystems pose.”

Asked how their companies are minimizing third-party risks, the most common answers were auditing or verifying their suppliers’ compliance (46%), sharing information with third parties or helping them in some other way to improve their cyber stance (42%), and addressing cost- or time-related challenges to cyber resilience (40%). But a majority have not refined their third-party criteria (58%), not rewritten contracts (60%), nor increased the rigor of their due diligence (62%) to identify third-party threats.

Simplifying the way to cybersecurity

Nearly three quarters of respondents said the complexity of their organization poses “concerning” cyber and privacy risks. Data governance and data infrastructure (77% each) ranked highest among areas of unnecessary and avoidable complexity.

Simplification is a challenge, but there is ample evidence that it is worthwhile.  While three in 10 respondents overall said their organizations had streamlined operations over the past two years, the “most improved” in our survey (the top 10% in cyber outcomes) were five times more likely to have streamlined operations enterprise-wide.  These top 10% organizations are also 10 times more likely to have implemented formal data trust practices and 11 times more likely to have a high level of understanding of third party cyber and privacy risks.

CEO engagement can make a difference

Executive and CEO respondents differ on how much the support the CEO provides on cyber, with CEOs seeing themselves as more involved in, and supportive of, setting and achieving cyber goals than their teams do. But there is no disagreement that proactive CEO engagement in setting and achieving cyber goals makes a difference.  Executives in the “most improved” group, reporting the most progress in cybersecurity outcomes, were 12x more likely to have broad and deep support on cyber from their CEOs.  Most executives also believe that educating CEOs and boards so they can better fulfill their cyber responsibilities is the most important act for realizing a more secure digital society by 2030.

Sean Joyce concluded: “Our survey shows that the most advanced organizations see cybersecurity as more than defense and controls, but as a means to drive sustained business outcomes and build trust with their customers.  As leaders of organizations, CEOs set the tone for focusing their cyber teams on bigger-picture, growth-related objectives rather than narrower, short-term expectations.”

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Are we on track to meet the SDG9 industry-related targets by 2030?

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A new report published by the United Nations Industrial Development Organization (UNIDO), Statistical Indicators of Inclusive and Sustainable Industrialization, looks at the progress made towards achieving the industry-related targets of Sustainable Development Goal (SDG) 9 of the UN 2030 Agenda for Sustainable Development. The report is primarily based on the SDG9 indicators related to inclusive and sustainable industrialization, for which UNIDO is designated as a custodian agency, showing the patterns of the recent changes in different country groups.

Six years after the adoption of the 2030 Agenda for Sustainable Development and its 17 SDGs, there has been increasing demand for information on whether the SDG targets could be reached, and what actions should governments take to accelerate progress. The UNIDO report introduces two new tools developed by UNIDO to help countries measuring performance and progress towards SDG9 industry-related targets: the SDG9 Industry Index and SDG9 progress and outlook indicators. The SDG9 Industry Index benchmarks countries’ performance on SDG-9 targets over 2000-2018 for 131 economies. In addition, the report develops two measures to answer the main questions:

  • Progress: how much progress has been made since 2000?
  • Outlook: how likely is it that the target will be achieved by 2030?

The global COVID-19 pandemic has inevitably had a negative toll on the progress towards reaching the SDG9 indicators, but the extent of the long-term impact remains to be seen. Industrialized countries continue to dominate global manufacturing industry, but their relative share has gradually declined over the past decade. In 2010, industrialized economies made up 60.3% of global production, which has decreased to 50.5% in 2020. China has been the largest manufacturer, now accounting for 31.7% of global production. This is a trend that has been reinforced by the pandemic.

Progress for the least developed countries (LDCs), at the heart of the 2030 Agenda, is a different story. While economic theory and countries’ experiences across the world have established that industrialization is an engine of sustainable growth, progress among LDCs remains very diverse. Asian LDCs are poised to double their share of manufacturing in GDP and thus meet SDG target 9.2, but African LDCs have stagnated.

SDG9 Industry Index

The SDG-9 Industry Index, consisting of five dimensions, covers three targets and five indicators and assigns a final score to countries. In 2018, the top ten consisted of exclusively industrialized economies, with Taiwan, Province of China, Ireland, Switzerland, the Republic of Korea and Germany making up the top five. In general, industrialized economies perform best in all dimensions of the Index.

The countries at the bottom of the ranking are LDCs, in particular those located in sub-Saharan Africa. Although some African countries have been displaying impressive growth rates, growth has been driven by an extended commodity boom and foreign capital inflows, while industrialization and structural transformation have stagnated. Additionally, substantial data is lacking for a significant amount of the countries. In the SDG9 Industry Index, only 24 out of 54 African countries are included, from which only eight are LDCs. It is clear that national statistics offices need strengthening, as data availability helps countries formulate, review and evaluate their development plans and programmes.

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ASEAN Survey Calls for Joint Action for an Inclusive and Sustainable Digital Economy

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The World Economic Forum launches today the ASEAN Digital Generation Report 2021, a special edition of its annual ASEAN youth survey report series, which examines the impact of the pandemic on personal income, savings and the role of digitalization in the region’s economic recovery. The report’s survey, conducted with close to 90,000 participants from Indonesia, Malaysia, the Philippines, Singapore, Thailand and Viet Nam, also flags the gaps needed to build a more inclusive and sustainable economy, namely: access to technology, digital skills training for all generations, and measures to enhance online trust and security.

The survey’s findings confirm e-commerce’s role as the key driver of growth in the ASEAN region. Wholesale and retail trade sector had the highest proportion of people starting new businesses (50%), while the logistics sector had the highest share of people finding new jobs (36%).

Notably, respondents from these two sectors are among those who also reported a decline in income. This could be because when people experienced a fall in income, they started new businesses in the wholesale and retail trade sector to leverage e-commerce opportunities.

A majority of respondents have adapted to the challenges of the coronavirus pandemic through significant digital adoption. Across ASEAN, 64% of respondents have digitalized 50% or more of their tasks, as have 84% of respondents who are owners of micro, small and medium enterprises (MSMEs). Respondents who reported greater levels of digitalization of their work and business reported lower levels of income decline. Similarly, business owners with an online presence were more likely to report an increase in savings (24%) and income (28%) compared to those without one (18%).

However, the benefits of digitalization are unevenly spread across the region. Those who are less “digitalized” found further digital adoption less appealing. As in 2020, respondents continued to point to expensive or poor internet quality or digital devices as the top barriers to digital adoption. While less digitalized respondents pointed to lack of digital skills as a key additional obstacle, more digitalized respondents pointed to trust and security concerns instead.

The identified obstacles were consistent across all six countries surveyed. As such, multistakeholder and regional joint actions are needed to unlock the full potential of ASEAN nations in the digital age and narrow these gaps.

“Through this annual survey, we wanted to understand the views, priorities and concerns of the digital users in ASEAN and gain statistical insights that will help inform and shape relevant regional policy,” said Joo-Ok Lee, Head of the Regional Agenda, Asia-Pacific, World Economic Forum. “The survey showed improving the quality and affordability of ASEAN digital infrastructure, equipping the ASEAN workforce with appropriate skills and enhancing people’s trust in the digital environment are crucial to bring ASEAN over the tipping point for inclusive and sustainable digital transformation.”

“One of the key findings was that digitalization has a ‘flywheel’ effect wherein users who had first experienced the benefits of technology were more eager to deepen their levels of digitalization,” added Santitarn Sathirathai, Group Chief Economist at Sea, a Singapore-based global consumer internet company.“It is critical for the public and private sector to work even more closely to lower any friction and barriers, which may prevent the positive digitalization momentum from taking place. Through this, digitalization can enable post- pandemic recovery in an inclusive and sustainable way.”

Between July and August 2021, the survey polled participants from Indonesia, Malaysia, the Philippines, Singapore, Thailand and Viet Nam. Some 77% of respondents are youths aged between 16 and 35, 56% female and 10% business owners.

This year’s edition continues tomonitor the impact of the pandemic on respondents, explores how the ongoing digitalization has benefited their life and society in the real economy, what stands in their way of further digitalization and maximization of such benefits, and how to tackle the identified obstacles.

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