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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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Zimbabwe’s Economy is Set for Recovery, but Key Risks Remain

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Gross Domestic Product (GDP) growth in Zimbabwe is projected to reach 3.9 percent in 2021, a significant improvement after a two-year recession, according to the World Bank Zimbabwe Economic Update (ZEU) launched today.

Economic growth this year will be led by recovery of agriculture as rains normalize, businesses adjust to limitations caused by the COVID-19 (coronavirus) pandemic, and inflation slows down. However, disruptions caused by the pandemic will continue to weigh on economic activity in Zimbabwe, limiting employment growth and improvements in living standards.

The ZEU, Overcoming Economic challenges, Natural Disasters, and the Pandemic: Social and Economic Impacts, provides the World Bank perspective on macroeconomic and poverty developments and discusses ways to strengthen public service delivery in key sectors. This is the third economic update for Zimbabwe produced by the World Bank.  Economic Updates are a standard World Bank tool for macroeconomic and fiscal monitoring.

The ZEU notes that economic recovery is expected to strengthen further in 2022 with GDP growing at 5.1 percent as the deployment of vaccines intensifies and implementation of National Development Strategy 1 (2021-2025) bears fruits. Overall, the COVID-19 global contagion continues to pose significant downside risks, and thus the global and local outlook remains uncertain. A prolonged pandemic, weaker global demand, and heightened macroeconomic instability could choke economic growth, increase poverty, and worsen human capital development outcomes.

Mitigating these risks requires domestic policies to strengthen and sustain macroeconomic stability – which is critical for consolidating economic recovery. Recent efforts to stabilize prices through rule-based monetary and exchange rate policies have been effective and must be continued and expanded. Fiscal policies supportive of these efforts have thus focused on avoiding monetary financing and quasi-fiscal activities, reducing distortive subsidies, and improving fiscal and debt transparency.

“Improving the country’s growth prospects will require further attention to policies that strengthen the quality of service delivery in the social sectors. Preserving lives during an unprecedented that protects livelihoods, strengthens social protection, improves food security, and ensures better education outcomes,” said Mukami Kariuki, World Bank Country Manager.  

Facing tight public finances and limited recourse to external financing, Zimbabwe will need to rely mostly on reallocating domestic resources to optimal public uses and leveraging private financing and humanitarian support where possible. Addressing underlying challenges in health, education, social protection, and food security will require sustained financing, strengthened accountability frameworks and investments in appropriate management information systems.

The ZEU reviews developments in 2019 and 2020; and emerging trends in 2021. Part One of the ZEU provides an overview of the macroeconomic and poverty context. Part Two assesses the impact of COVID-19 and other exogenous shocks on delivery of basic services to the poor and proposes mitigating actions for discussion. It also summarizes key policy options needed to stabilize Zimbabwe’s economy, minimize the social costs of the transition, and prepare for an economic recovery.

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Slow jobs recovery and increased inequality risk long-term COVID-19 scarring

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The labour market crisis created by the COVID-19 pandemic is far from over, and employment growth will be insufficient to make up for the losses suffered until at least 2023, according to a new assessment by the International Labour Organization (ILO).

The ILO’s World Employment and Social Outlook: Trends 2021  (WESO Trends) projects the global crisis-induced ‘jobs gap’ will reach 75 million in 2021, before falling to 23 million in 2022. The related gap in working-hours, which includes the jobs gap and those on reduced hours, amounts to the equivalent of 100 million full-time jobs in 2021 and 26 million full-time jobs in 2022. This shortfall in employment and working hours comes on top of persistently high pre-crisis levels of unemployment, labour underutilization and poor working conditions.

In consequence, global unemployment is expected to stand at 205 million people in 2022, greatly surpassing the level of 187 million in 2019. This corresponds to an unemployment rate of 5.7 per cent. Excluding the COVID-19 crisis period, such a rate was last seen in 2013.

The worst affected regions in the first half of 2021 have been Latin America and the Caribbean, and Europe and Central Asia. In both, estimated working-hour losses exceeded eight per cent in the first quarter and six per cent in the second quarter, compared to global working-hour losses of 4.8 and 4.4 per cent in the first and second quarter, respectively.

Global employment recovery is projected to accelerate in the second half of 2021, provided that there is no worsening in the overall pandemic situation. However this will be uneven, due to unequal vaccine access and the limited capacity of most developing and emerging economies to support strong fiscal stimulus measures. Furthermore, the quality of newly created jobs is likely to deteriorate in those countries.

The fall in employment and hours worked has translated into a sharp drop in labour income and a corresponding rise in poverty. Compared to 2019, an additional 108 million workers worldwide are now categorized as poor or extremely poor (meaning they and their families live on the equivalent of less than US$3.20 per person per day). “Five years of progress towards the eradication of working poverty have been undone,” the report says, adding that this renders the achievement of the UN Sustainable Development Goal of eradicating poverty by 2030 even more elusive.

The COVID-19 crisis has also made pre-existing inequalities worse by hitting vulnerable workers harder, the report finds. The widespread lack of social protection – for example among the world’s two billion informal sector workers – means that pandemic-related work disruptions have had catastrophic consequences for family incomes and livelihoods.

The crisis has also hit women disproportionately. Their employment declined by 5 per cent in 2020 compared to 3.9 per cent for men. A greater proportion of women also fell out of the labour market, becoming inactive. Additional domestic responsibilities resulting from crisis lockdowns have also created the risk of a “re-traditionalization” of gender roles.

Globally, youth employment fell 8.7 per cent in 2020, compared with 3.7 per cent for adults, with the most pronounced fall seen in middle-income countries. The consequences of this delay and disruption to the early labour market experience of young people could last for years.

The pandemic’s impact on young people’s labour market prospects is laid out in greater detail in an ILO brief published alongside the WESO Trends. The Update on the youth labour market impact of the COVID-19 crisis  also finds that gender gaps in youth labour markets became more pronounced.

“Recovery from COVID-19 is not just a health issue. The serious damage to economies and societies needs to be overcome too. Without a deliberate effort to accelerate the creation of decent jobs, and support the most vulnerable members of society and the recovery of the hardest-hit economic sectors, the lingering effects of the pandemic could be with us for years in the form of lost human and economic potential and higher poverty and inequality,” said ILO Director-General, Guy Ryder. “We need a comprehensive and co-ordinated strategy, based on human-centred policies, and backed by action and funding. There can be no real recovery without a recovery of decent jobs.”

As well as looking at working hour and direct employment losses, and foregone job growth, the WESO outlines a recovery strategy structured around four principles: promoting broad-based economic growth and the creation of productive employment; supporting household incomes and labour market transitions; strengthening the institutional foundations needed for inclusive, sustainable and resilient economic growth and development; and using social dialogue to develop human-centred recovery strategies.

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Universal Access to Sustainable Energy Will Remain Elusive Without Addressing Inequalities

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During the last decade, a greater share of the global population gained access to electricity than ever before, but the number of people without electricity in Sub-Saharan Africa actually increased. Unless efforts are scaled up significantly in countries with the largest deficits the world will still fall short of ensuring universal access to affordable, reliable, sustainable, and modern energy by 2030, according to Tracking SDG 7: The Energy Progress Report released today by the International Energy Agency (IEA) the International Renewable Energy Agency (IRENA), the UN Department of Economic and Social Affairs (UN DESA), the World Bank, and the World Health Organization (WHO).

According to the report, significant progress has been made since 2010 on various aspects of the Sustainable Development Goal (SDG) 7, but progress has been unequal across regions. While more than one billion people gained access to electricity globally over the last decade, COVID’s financial impact has made basic electricity services unaffordable for 30 million more people, the majority located in Africa. Nigeria, the Democratic Republic of Congo and Ethiopia had the biggest electricity access deficits, with Ethiopia replacing India in the Top 3.

Globally, the number of people without access to electricity declined from 1.2 billion in 2010 to 759 million in 2019. Electrification through decentralized renewable-based solutions in particular gained momentum. The number of people connected to mini grids has more than doubled between 2010 and 2019, growing from 5 to 11 million people. However, under current and planned policies and further affected by the COVID-19 crisis, an estimated 660 million people would still lack access in 2030, most of them in Sub-Saharan Africa.

At the same time, some 2.6 billion people remained without access to clean cooking in 2019, one third of the global population. Largely stagnant progress since 2010 leads to millions of deaths each year from breathing cooking smoke, and without rapid action to scale up clean cooking the world will fall short of its target by 30 percent come 2030. The state of access in the Sub-Saharan African region is characterized by population growth outpacing gains in the number of people with access, so that 910 million in the region lack access to clean cooking. The top 20 access-deficit countries account for 81 percent of the global population without access to clean fuels and technologies. Of these, the Democratic Republic of the Congo, Ethiopia, Madagascar, Mozambique, Niger, Uganda and Tanzania had less or equal to 5 percent of their populations with access to clean cooking. On a positive note, Indonesia, Cambodia and Myanmar have made gains each year over the report period.

The report examines various ways to bridge the gaps to reach SDG7, chief among them the goal of significantly scaling up renewables – which have proven more resilient than other parts of the energy sector during the COVID-19 crisis. While renewable energy has seen unprecedented growth over the last decade, its share of total final energy consumption remained steady as global energy consumption grew at a similar rate. Renewables are most dynamic in the electricity sector, reaching around 25 percent in 2018, while progress in the heat and transport sectors have been much slower.

More than one third of the increase in renewable energy generation in 2018 can be attributed to East Asia – driven by large uptakes of solar and wind energy in China. The largest country-level advances in renewable energy in 2018 were observed in Spain, owing to higher hydropower generation, followed by Indonesia where a rapid uptake of bioenergy for power generation played a substantial role. To significantly increase the share of renewable energy in line with the SDG 7 target, current efforts need to accelerate in all end-use sectors to scale uptake of renewables while containing total energy demand.

Energy intensity improvements (a proxy for energy efficiency) are moving further away from the target set under SDG7 for 2030. The rate of global primary energy intensity improvement in 2018 was 1.1 percent compared to 2017, the lowest average annual rate of improvement since 2010. The annual improvement until 2030 will now need to average 3 percent if we are to meet the goal.

Accelerating the pace of progress across all regions and indicators will require stronger political commitment, long-term energy planning, and adequate policy and scale incentives to spur faster uptake of sustainable energy solutions. Although clean energy investments continue to be sourced primarily from the private sector, the public sector remains a major source of financing and is central in leveraging private capital, particularly in developing countries and in a post-COVID context. One of the newest indicators in the report, international public financial flows to developing countries, shows that international financial support continue to be concentrated in a few countries and failing to reach many of those most in need. Flows to developing countries in support of clean and renewable energy reached $14 billion in 2018, with a mere 20 percent going to the least-developed countries, which are the furthest from achieving the various SDG7 targets. An increased emphasis on “leaving no one behind” is required in the years ahead. 

This is the seventh edition of this report, formerly known as the Global Tracking Framework (GTF). This year’s edition was chaired by the United Nations Statistics Division. 

The report this year comes at a crucial time as Governments and stakeholders are gearing up for the UN High-level Dialogue on Energy, a summit-level meeting in September 2021 that will examine steps needed to achieve SDG7 by 2030 and mobilize voluntary commitments and actions in the form of Energy Compacts.

Funding for the report was provided by the World Bank’s Energy Sector Management Assistance Program (ESMAP).

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