European economic forecast : summer 2018 (Interim).
Date: 2018-09-05
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: EU Member State, European Union, economic fluctuation, economic forecasting, economic growth, economic policy, economic situation, euro area, gross domestic product, report, short-term forecast

ISSN 2443-8014 (online)

European 
Economic 
Forecast

Summer 2018 (Interim)

INSTITUTIONAL PAPER 084 | JULY 2018

EUROPEAN ECONOMY

Economic and 
Financial Affairs

           
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European Commission 
Directorate-General for Economic and Financial Affairs 

European Economic Forecast 
Summer 2018 (Interim)  

EUROPEAN ECONOMY                                                                                    Institutional Paper 084 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONTENTS 

Resilient growth amid increased uncertainty 

1. 

2. 

Euro area and EU outlook 
1.1. 
1.2. 
1.3. 
1.4. 
1.5. 
1.6. 

Global growth becoming less synchronised 
European financial markets show resilience to risks 
Expansion continues in lower gear 
Labour market conditions set to continue improving 
Energy prices drive inflation higher in the near term 
Risks tilted to the downside 

Italy 

Prospects by Member States 
Belgium 
2.1. 
Bulgaria 
2.2. 
Czech Republic 
2.3. 
Denmark 
2.4. 
Germany 
2.5. 
Estonia 
2.6. 
Ireland 
2.7. 
Greece 
2.8. 
Spain 
2.9. 
2.10. 
France 
2.11.  Croatia 
2.12. 
2.13.  Cyprus 
Latvia 
2.14. 
Lithuania 
2.15. 
Luxembourg 
2.16. 
2.17. 
Hungary 
2.18.  Malta 
2.19. 
2.20.  Austria 
Poland 
2.21. 
Portugal 
2.22. 
Romania 
2.23. 
Slovenia 
2.24. 
Slovakia 
2.25. 
Finland 
2.26. 
Sweden 
2.27. 
The United Kingdom 
2.28. 

The Netherlands 

Statistical Annex 

LIST OF TABLES 

1. 
1.1. 

Overview - the summer 2018 (interim) forecast 
International environment 

LIST OF GRAPHS 

1.1.  Global GDP growth and JPMorgan Global Composite PMI 
1.2.  Oil price, developments and assumptions 

1 

2 
2 
3 
5 
8 
9 
10 

12 
12 
12 
13 
13 
14 
15 
15 
16 
16 
17 
18 
18 
19 
20 
20 
21 
22 
22 
23 
23 
24 
24 
25 
26 
26 
27 
27 
28 

30 

1 
2 

2 
3 

iii 

 
 
 
1.3. 
1.4. 
1.5. 
1.6. 
1.7. 
1.8. 

Benchmark 10-year government bond spreads, selected Member States 
Real GDP growth, EU28 (contribution by Member States) 
Economic Sentiment Indicator and PMI Composite Output, euro area 
Retail trade volumes and retail confidence, euro area 
Real GDP and its components, euro area 
Real GDP growth, euro area and Member States, 2016-2017 versus 2018-
2019 
Employment expectations, DG ECFIN surveys, euro area 

1.9. 
1.10.  HICP, euro area 
1.11. 

Inflation expectations derived from implied forward inflation-linked swap 
rates 

4 
5 
6 
6 
7 

8 
9 
9 

10 

iv 

 
 
 
 
 
 
Summer 2018 (Interim) forecast 

RESILIENT GROWTH AMID INCREASED UNCERTAINTY 

Following  five  consecutive  quarters  of  vigorous  GDP  growth,  economic  momentum  in  the  euro  area 
moderated in the first half of the year. GDP growth eased to 0.4% (q-o-q) in the first quarter and the 
evidence available so far suggests that this softness extended into the second quarter. Outside the EU, 
activity remains solid overall but growth rates are becoming more differentiated across countries and 
regions and downside risks are rising.  

Although the slowdown of European economic activity in early 2018 is widely believed to have reflected 
a  number  of  temporary  factors,  confidence  and activity  failed  to  rebound  in  spring,  as trade  tensions 
escalated, political uncertainty rose in some Member States, and oil prices continued their rising trend. 
While the nature of the current ‘soft patch’ is not yet fully clear and developments in global trade policy 
have  emerged  as  a  major  downside  risk  to  the  near  and  medium  term  outlook,  the  fundamentals  for 
sustained  growth  in  Europe  remain  in  place.  The  euro  area  economy  continues  to  benefit  from 
supportive  monetary  conditions,  with  low  financing  costs  for  companies  and  governments  despite  the 
expected gradual withdrawal of monetary stimulus. Furthermore, brightening labour market conditions, 
as well as improving household balance sheets and still elevated levels of consumer confidence, should 
ensure continued private consumption growth going forward despite some dampening effect from higher 
energy prices. Finally, while the support from the external environment is subject to great uncertainty in 
view of current trade policy tensions, the direct impact of protectionist measures so far remains limited 
and the baseline forecast continues to see an expansion in global trade this year and next, which should 
ensure continued demand for European goods and services. 

Overall,  euro  area  and  EU  economies  are  set  to  continue  expanding  this  year  and  in  2019,  but  at  a 
more moderate pace than in 2017 when growth was the fastest in a decade. Mirroring the weaker-than-
expected activity in the first half of the year, the outlook for GDP growth in the euro area and the EU in 
2018  has  been  revised  to  2.1%,  down  by  0.2  pps.  compared  to  the  spring  forecast,  and  remains 
unchanged at 2.0% in 2019. Wages and core inflation pressures are still expected to rise only gradually 
over this year and next. Headline inflation in the euro area has, however, been revised up to 1.7% in 
both 2018 and 2019 as a result of higher energy prices. 

This  relatively  benign  outlook  is,  however,  predicated  on  the  non-escalation  of  trade  tensions  and 
conflicts  at  global  level.  Hence  significant  downside  risks  exist.  First  and  foremost,  if  trade  tensions 
with  the  US  were  to  escalate  further,  this  could  dampen  confidence  more  permanently,  weighing  on 
global investment and trade flows, and likely disrupting the current global cyclical upswing. This adds 
to  concerns  about  the  potential  for  negative  consequences  from  renewed  bouts  of  financial  market 
volatility  and  a  faster-than-expected  tightening  of  global  financing  conditions,  as  well  as  increased 
imbalances  stemming  from  the  highly  pro-cyclical  fiscal  policy  in  the  US.  Additional  risks  relate  to 
political  and  policy  uncertainty  in  a  number  of  EU  countries  (including  the  outcome  of  Brexit 
negotiations), as well as political and geopolitical tensions outside Europe.  

1 

2017201820192018201920172018201920182019Euro area2.42.12.02.32.01.51.71.71.51.6EU272.62.32.12.52.21.61.81.81.61.7EU282.42.12.02.32.01.71.91.81.71.8Table 1:Overview - the summer 2018 (interim) forecastReal GDPInflationforecastforecastforecastforecastSummer 2018Spring 2018Summer 2018Spring 2018 
 
 
 
 
 
 
Summer 2018 (Interim) forecast 

1. 

EURO AREA AND EU OUTLOOK 

1.1.  GLOBAL  GROWTH  BECOMING 

LESS 

SYNCHRONISED  

activity  is  expected  to  slow  in  both  the  US  and 
China (see Table 1.1).  

now 

The US economy continues to benefit from several 
tailwinds, including a strong labour market, strong 
sentiment and fiscal stimulus. However, this highly 
pro-cyclical  loosening  of  fiscal  policy  entails 
significant  risks  and  is  expected  to  further  widen 
the  US  current  account  deficit  in  the  near  term, 
which could reinforce protectionist tendencies. The 
protectionist  measures 
to 
materialise  are 
to  weigh  on  business 
likely 
confidence and investment in the US. In emerging 
markets,  economic  performance  is  forecast  to 
diverge  somewhat.  The  financial  market  turmoil 
experienced  by  some  of  the  more  vulnerable 
countries  in  recent  weeks  (e.g.  in  Argentina  and 
Turkey)  implies  lower  growth  over  the  forecast 
horizon,  while  other  emerging  markets  are 
expected to post solid growth (emerging Asia) and 
some  are  set  to  benefit  from  higher  oil  prices 
(Russia and OPEC countries).  

beginning 

Global  import  volumes  (outside  the  EU)  are 
expected to increase by 4.9% in 2018, moderately 
less  than  in  2017  and  less  than  expected  in  the 
spring  forecast.  The  first  quarter  of  2018  retained 
the  strong  momentum  from  the  previous  year, 
boosted  by  strong  imports  in  emerging  Asia 
(including  China)  and  Latin  America  and  solid 
in  most  advanced  economies.  Trade 
imports 
growth  will,  however, 
level  off  and 
likely 
decelerate later this year and in 2019, when global 
import  growth  (outside  the  EU)  is  expected  to 
settle down to a still-solid 4.4%. This deceleration 
reflects  increased  trade  tensions  following  the 
measures 
rising 
uncertainty  over  global  growth  in  the  medium 
term.  The  trend  has  already  been  signalled  by  a 
gradual  worsening  of  high-frequency 
trade 
indicators,  although  these  mostly  remain  above 
their historical averages. 

implemented 

and 

far 

so 

from 

the  previous  quarter 

Global economic activity remains solid overall but 
growth  rates  are  becoming  more  differentiated 
across  countries  and  regions  and  downside  risks 
are  rising.  GDP  data  for  the  first  quarter  of  2018 
indicate  that  growth  momentum  remains  strong, 
with  global  growth  advancing  by  0.9%  (q-o-q), 
unchanged 
(see 
Graph 1.1). Growth slowed somewhat in advanced 
economies  but  picked  up  in  emerging  markets, 
with robust growth in emerging Asia, led by China 
and  India.  At 
time,  several  other 
emerging  markets  surprised on the  downside  (e.g. 
South  Africa,  Brazil).  High-frequency  indicators 
point 
in  global 
manufacturing  output,  which  has  so  far  been 
compensated by a rebound in the service sector.  

to  a  weakening  momentum 

the  same 

The  outlook  for  global  growth  outside  the  EU 
remains  unchanged  at  4.2%  for  2018,  despite 
sizeable  downward  revisions  for  Latin  America. 
Global  growth  outside  the  EU  is  projected  to 
moderate  somewhat  to  4.1%  in  2019,  slightly 
weaker  than  projected  in  the  spring,  as  economic 

2 

35404550556065-1.5-1.0-0.50.00.51.01.50809101112131415161718q-o-q%Graph 1.1: Global GDP growth and JPMorgan Global Composite PMIGrowth contribution from emerging markets, pps. (lhs)Growth contribution from advanced economies, pps. (lhs)Composite PMI - emerging markets (rhs)Composite PMI - advanced economies (rhs)Sources: Data Insight, IMF and national statistical institutes for GDP, JPMorgan/Markit for PMI.index > 50 = expansionTable 1.1:(Annual percentage change)201420152016201720182019201720182019World (excl.EU)3.83.53.43.94.24.13.94.24.2World (excl.EU) exports of goods and services3.21.31.74.74.24.14.74.44.1World (excl.EU) imports of goods and services3.40.61.15.34.94.45.35.14.5Real GDP growthMerchandise trade volumesInternational environmentSummer interim 2018Spring 2018forecastforecast  
 
 
 
 
 
 
 
Futures markets suggest higher oil prices  

for 

tensions 

and  potential 

to  partly  compensate 

The  oil  price  surges  in  May,  driven  by  strong 
levelled  off 
tightening  supplies, 
demand  and 
temporarily  in  June  after  OPEC  (and  Russia) 
signalled  their  willingness  to  increase  oil  supplies 
with  immediate  effect.  These  additional  supplies 
the 
are  expected 
continuing supply disruptions in Venezuela and the 
risk of lower supply  from Iran in the  wake  of US 
sanctions.  Price  volatility  around  current  levels  is 
expected  to  persist  for  the  remainder  of  2018,  as 
geopolitical 
supply 
disruptions  remain  unpredictable  and  existing 
stocks  have  declined.  As  higher  oil  prices  weigh 
on oil demand growth and additional supplies from 
the US should become available in 2019, oil prices 
are  projected  to  edge  down,  mainly  in  the  second 
half of 2019. Overall, based on futures markets, an 
average price of 72.8 USD/bbl is assumed in 2018 
–  equivalent  to  a  33%  increase  from  2017  and 
5.6% higher than assumed in the spring forecast  – 
and  71.8  USD/bbl  for  2019.  In  euro  terms,  given 
the  euro’s  recent  depreciation  vis-à-vis  the  US 
dollar,  upward  revisions  compared  to  the  spring 
are higher, amounting to 9.9% in 2018 and 16.6% 
in 2019 (see Graph 1.2).  

Downside risks to the global growth outlook have 
intensified  since  the  spring  forecast,  most  notably 
those  related  to  the  rise  in  trade  protectionism. 
Some trade-related risks have already materialised: 
the  US  imposed  tariffs  on  steel  and  aluminium 
from  China,  the  EU,  Canada  and  Mexico;  and 
selected  imports  from  China;  and  launched  an 
investigation  into  automobile  imports  on  national 
security  grounds.  Several  US  trading  partners, 
including  the  EU,  have  responded  with  counter-
measures (see technical box for an overview of the 
direct 
implemented  measures).  While 

the 

Summer 2018 (Interim) forecast 

effect 

of 
likely 

the  measures 
macroeconomic 
implemented  so  far  are 
to  be  rather 
limited, (1)  the  broader  impact  on  confidence  and 
investment  decisions  could  be  much  more 
significant and immediate. The central scenario for 
global  growth  and  trade  does  not  incorporate  a 
further  escalation  in  trade  protectionism  but  this 
remains  a  serious  downside  risk  that  could  derail 
global  growth  over  the  forecast  horizon  and 
beyond.  

have 

from 

currencies 

riskier  assets 

Financial  vulnerabilities 
in  several  emerging 
markets  linked  to  high  debt  and  leverage  present 
another  downside  risk  to  the  global  outlook. 
Emerging  market 
been 
increasingly  coming  under  pressure  in  recent 
weeks as the monetary policy normalisation in the 
US and a stronger US dollar have shifted investor 
interest  away 
in  more 
vulnerable  emerging  market  economies.  Although 
the  ongoing 
financial 
conditions has not had a material impact on growth 
and financial stability so far (with the exception of 
isolated  cases  such  as  Argentina),  the  pressure  on 
emerging  markets  is  clearly  increasing  and  could 
result  in  unforeseen  disruptions  going  forward. 
Among  them,  China  is  vulnerable  due  to  its  high 
financial  leverage  and  exposure  to  protectionist 
measures.  

tightening  of  global 

1.2. 

EUROPEAN  FINANCIAL  MARKETS  SHOW 
RESILIENCE TO RISKS 

Increasing monetary policy divergence… 

that 

in  June 

Monetary policy divergence between the euro area 
and  the  US  has  increased  further.  While  the  ECB 
signalled 
it  will  maintain  an 
accommodative  monetary  policy  stance,  the  US 
Federal  Reserve  has  increased  its  target  range  for 
the  federal  funds  rate  by  25 bps  to  1.75%-2.00%. 
Moreover,  the  Fed  has  indicated  that  another  two 
interest  rate  hikes  may  be  required  in  2018, 
compared  to  just  one  previously,  and  that  three 
interest  rates  hikes  may  be  necessary  next  year. 
The resulting divergence in expected future policy 
rates  between  the  US  and  the  euro  area  has  been 
introduction  of  an 
further  magnified  by 
enhanced  ECB  forward  guidance  on  policy  rates, 
according  to  which  key  ECB  interest  rates  are 
expected  ‘to  remain  at  their  present  level  at  least 

the 

(1)  ECB  (2018).  ‘Implications  of  rising  trade  tensions  for  the 
global  economy’.  ECB  Economic  Bulletin  3,  pp.  21-25. 
(see Box 1) 

3 

10305070901101301213141516171819price per bblGraph 1.2: Oil price, developments and assumptionsUSD/bblEUR/bblannualassumption 
 
                                                           
Summer 2018 (Interim) forecast 

through  the  summer  of  2019’.  Although  net  asset 
purchases  are  anticipated  to  end  in  December 
2018 (2), 
incoming  data 
is  subject 
confirming the medium-term inflation outlook. 

this 

to 

…reflected in a weakening euro. 

The  euro  has  weakened  by  more  than  5%  against 
the US dollar since mid-April this year in a context 
of  fiscal  stimulus  and  an  improved  economic 
outlook  in  the  US;  and  weakening  economic 
momentum and rising political uncertainty in some 
euro  area  Member  States.  In  nominal  effective 
terms, the euro has depreciated by 1.5%. 

Financial markets have taken a more cautious 
tone recently… 

Prices on global financial markets are increasingly 
reflecting  investor  concerns  about  the  adverse 
effects  of  trade  tensions.  The  upside  pressure  on 
oil  prices  and  the  further  expected  rise  in  US 
interest rates have also led global investors to take 
a  more  cautious  stance,  particularly  in  emerging 
markets. In the EU, political developments in some 
Member  States  have  weighed  on 
investor 
sentiment.  

risk 

area, 

renewed 

aversion, 

Benchmark  yields  for  some  euro  area  Member 
States  have  fallen  back  in  the  past  few  months 
amid  weaker-than-expected  economic  data  in  the 
and 
euro 
accommodative  monetary  policy.  Italian  bond 
yields  spiked  briefly  over  political  stability  and 
fiscal sustainability concerns but quickly stabilised 
below  3%  (for  10-year  bonds),  and  the  initial 
contagion  to  other  sovereign  bonds  proved  brief 
(see  Graph 1.3).  In 
the  US,  Treasury  yields 
oscillated  around  3%  before  declining  somewhat, 
as  fragilities  in  some  emerging  market  economies 
triggered higher risk aversion and pushed investors 
back to safe-haven sovereign bonds.  

EU  stock  markets  continued  to  oscillate  without 
clear direction. While the depreciation of the euro 
vis-à-vis the US dollar has been supportive to euro 
area 
indicators 
compounded  with  an  escalation  of  trade  tensions 
and  the  increase  in  oil  prices  weighed  on  EU 
shares 
equity  markets. 

stocks,  weaker 

economic 

European 

bank 

(2)  To  be  precise,  the  ECB  announced  that:  “the  Governing 
Council  anticipates  that,  after  September  2018,  subject  to 
incoming  data  confirming  [its]  medium-term  inflation 
outlook, the monthly pace of the net asset purchases will be 
reduced to EUR 15 billion until the end of December 2018 
and that net purchases will then end.” 

4 

curves 

as  yield 

underperformed 
flattened. 
Corporate bond yields have risen over the past few 
months,  but,  taken  in  historical  perspective,  risk 
premia  are  still  compressed  in  many  segments. 
Corporate  bond  issuance  volumes  have  been 
strong, particularly in the high-yield segment. 

Meanwhile,  macro-financial  vulnerabilities  are 
building up in several parts of the global financial 
system.  Globally,  valuations  of  certain  financial 
(and  real)  assets  continue  to  seem  stretched. 
Markets  appear  to  be  pricing  in  expectations  that 
the  unwinding  of  unconventional  monetary  policy 
measures  in  major  regions  of  the  world  will  lift 
risk-free  interest  rates  in  an  orderly  and  moderate 
way.  

…but funding flows remain strong. 

Bank  lending  continued  to  expand  over  the  last 
few  months  in  the  euro  area.  Net  lending  growth 
stood  at  3.6%  for  non-financial  corporations 
(NFCs) and 2.9% for the household sector in May. 
The April 2018 ECB Bank Lending Survey points 
to  further  easing  of  credit  standards  in  2018-Q2. 
Demand for bank loans has been supported by the 
low  level  of  interest  rates  and  interest  rate 
differentials  between  euro  area  Member  States 
have  narrowed  further  over  the  last  couple  of 
months  for  both  households  and  NFCs,  except  in 
some  Member  States.  Market  funding  for  NFCs 
continued to expand in the euro area. 

Overall,  households  and  NFCs  are  expected  to 
remain  unconstrained  financially,  with  benign 
financial  conditions  assumed  over  the  forecast 
horizon. In addition, the euro area corporate sector 
continues  to  run  funding  surpluses  generating 
substantial  internal  funds,  which  could  potentially 
be used to boost investment.  

01002003004005006007008001718ESELPTITGraph 1.3: Benchmark 10-year government bond spreads, selected Member Statesbps.Source: Macrobond 
                                                           
 
1.3. 

EXPANSION CONTINUES IN LOWER GEAR  

Growth  momentum  diminished  at  the  start  of 
the year… 

In  mid-2018,  the  European  economic  outlook 
remains  solid  but  has  moved  into  a  lower  gear 
compared  to  last  year.  In  the  first  quarter  of  the 
year, GDP grew by 0.4% (q-o-q) in both the euro 
area and the EU, following 0.7% (q-o-q) growth in 
the five preceding quarters in both areas. All in all, 
this  represents  the  20th  consecutive  quarter  of 
expansion.  The  weaker  outturn  may  reflect  some 
adjustment  given  that  growth  has  been  running 
above  its  long-run  rate  for  some  time.  Temporary 
factors (3)  such  as  unusual  weather  conditions, 
strikes  in  some  Member  States,  the  timing  of 
Easter and a  wave of influenza-related sick leaves 
are also likely to have played a role, but are hard to 
quantify. Despite the soft patch, GDP expanded in 
the  first  quarter  in  all  reporting  Member  States 
except Romania and Estonia.  

…amid a marked shift in growth composition… 

The  GDP  breakdown  for  2018-Q1  shows  that  the 
expansion  in  the  euro  area  was  mainly  supported 
by  private  consumption  and  investment,  whereas 
the  contribution  of  public  consumption  was 
neutral.  At  the  same  time,  net  exports  became  a 
drag 
two  consecutive 
following 
quarters of positive contributions to GDP growth.  

(-0.2 pps.), 

Private  consumption  gained  some  momentum  in 
the  first  quarter  (from  0.2%  q-o-q  to  0.5%),  as 
improve  and 
labour  markets  continued 
consumer  confidence 
than 
average. The pick-up was broad-based across most 
of the large euro area economies.  

remained  higher 

to 

Investment  growth  receded  somewhat  to  0.5%  in 
the  first  quarter  (after  1.2%),  with  investment 
expanding across the largest euro area economies, 
apart  from  Italy.  The  contribution  of  changes  in 
turned  positive, 
inventories 
preventing  an  even  sharper  slowdown.  The  assets 
breakdown indicates that the slowdown was due to 
non-construction spending.  

to  GDP  growth 

After  20  consecutive  quarters  of  expansion, 
including  growth  of  2.2%  in  the  last  quarter  of 

(3)  On  whether 

the  moderation  has  any  bearing  on 
medium-term  growth  see  Draghi,  M.  (2018).  ‘Monetary 
policy  in  the  euro  area’.  Speech  at  the  ECB  Forum  on 
Central Banking, Sintra, 19 June. 

Summer 2018 (Interim) forecast 

2017, exports of goods and services contracted by 
0.4%  (q-o-q)  in  the  first  quarter  of  this  year.  The 
decline  in  exports  was  broad-based  across  the 
largest euro area economies, apart from Spain, and 
particularly  marked 
Italy  and  Germany. 
in 
According  to  Eurostat’s  international  trade  data, 
extra-EU  exports  of  goods  fell  by  0.3%  (q-o-q) 
(+2.1%  q-o-q  in  2017-Q4)  whereas  intra-EU 
exports  fell  by  0.6%  (following  +0.9%  in  the 
preceding quarter). Imports contracted as well, but 
the fall was more muted than that of exports.  

…and  available  data 
moderation in the second quarter… 

signal  continued 

Incoming  data  on  activity  and  sentiment  provide 
more  evidence  that  the  soft  patch  in  euro  area 
activity  extended  into  the  second  quarter.  While 
the impact of temporary factors has largely waned, 
activity and sentiment have so far failed to recover.  

In  June,  the  Commission’s  Economic  Sentiment 
Indicator (ESI) remained broadly unchanged in the 
euro  area  for  the  third  consecutive  month,  while 
the  Eurozone  Flash  Composite  Output  Purchasing 
Managers’  Index  (PMI)  rose  from  an  18-month 
low  in  May,  driven  by  the  service  sector  (see 
Graph 1.5). 
in 
manufacturing continued to deteriorate, falling to a 
18-month  low.  Weaker  output  and  order  books 
have been linked to intensifying trade and political 
concerns.  

Meanwhile, 

sentiment 

5 

2.31.92.42.12.00.00.51.01.52.02.53.01516171819DEESFRITNLRoEUGraph 1.4: Real GDP growth,  EU28 (contribution by Member States)forecastpps. 
                                                           
 
Summer 2018 (Interim) forecast 

nine years, (5)  which  bodes  well  for  business 
investment spending. 

The  momentum in euro area  industrial production 
deteriorated  further  in  April  to  -1.2%  (3m-o-3m) 
(from  -0.6%  in  March),  with  momentum  of  new 
industrial  orders  falling  from  -1.0%  in  March 
to -2.2% in April.  

Available  high-frequency indicators are consistent 
with  a  moderation  of  private  consumption 
expenditure  in  2018-Q2.  After  moving  up  in 
2018-Q1,  consumer  confidence  edged  downwards 
again 
the 
Commission’s  Retail  Trade  Confidence  Indicator 
also  decreased  in  the  euro  area  and  the  EU  in  the 
second  quarter,  although  it  remains  at  historically 
high levels. 

in  2018-Q2.  At 

the  same 

time, 

in 

level 

first  quarter 

By contrast, the momentum in retail trade volumes 
geared up in May (+0.6% 3m-o-3m), following an 
unchanged 
(see 
the 
Graph 1.6), whereas car registrations fell markedly 
over  the  same  period  (-1.0%  3m-o-3m,  following 
+1.4% in 2018-Q1). Loans to euro area households 
for  consumption  purposes  recorded  an  annual 
increase  of  7.2%  in  May,  close  to  its  highest 
growth rate since late 2006. (4)  

following  a  contraction 

At  the  same  time,  high-frequency  indicators  of 
business  investment  have  been  more  benign.  The 
industrial production of capital goods rose in April 
(+1.9%  m-o-m), 
in 
2018-Q1  (-2.0%).  The  capacity  utilisation  rate  in 
manufacturing  is  close  to  its  highest  since  2008, 
which  suggests  a  growing  obsolescence  of  the 
increasingly 
capital 
mentioned  as  a 
limiting  production. 
Furthermore,  May  2018  saw  the  strongest  annual 
growth  of  loans  to  non-financial  corporations  in 

stock,  with 

equipment 

factor 

(4)  For an up-to-date statistical picture of economic conditions 
for  the  household  sector  see  ECB  (2018).  ‘Household 
sector report’. May 2018. 

6 

This  positive  momentum  is  also  visible  in  the 
Commission’s  Construction  Confidence  Indicator, 
which reached its highest level since early-1990 in 
2018-Q2.  Construction  output  in  April  increased 
by  1.8%  (m-o-m)  in  the  euro  area  (+1.2%  in  the 
EU) after remaining unchanged in 2018-Q1 (-0.4% 
in  the  EU).  At  the  same  time,  loans  for  house 
purchases grew at an annual rate of 3.1% in May, 
close  to  the  3.3%  reached  in  December  2017, 
which was the highest rate since September 2011. 

Exports are expected to have remained subdued in 
the second quarter. The assessment of export order 
books  in  the  Commission’s  manufacturing  survey 
has  fallen  from  the  post-crisis  high  reached  in 
2018-Q1.  The  IHS  Markit’s  Manufacturing  PMI 
new  export  orders  index  points  to  a  continued 
underperformance  in  both  April  and  May.  And 
data  from  the  Centraal  Planbureau  (CPB)  on  the 
volume  of  trade  in  goods  in  the  euro  area  shows 
that  the  growth  momentum  (3m-o-3m)  moved 
further down to -1.4% in April (-0.7% in March).  

…as the outlook is clouded by lower sentiment 
and uncertainty… 

The recent spell of weak data, coupled with fading 
tailwinds  and  an  increasing  number  of  headwinds 
suggest  that  the  European  economy  is  unlikely  to 
regain the strong momentum it enjoyed in 2017.  

Rising  headwinds  include  first  and  foremost  the 
fall-out from ongoing trade tensions (6). The central 

(5)  Loans adjusted for sales and securitisation. 
(6)  See ECB (2018). ‘Implications of rising trade tensions for 
the  global  economy’.  ECB  Monthly  Bulletin  May  2018, 
pp. 21-5  (Box  1)  and  A.  Barattieri,  M.  Cacciatore  and 

30405060607080901001101200809101112131415161718Economic Sentiment Indicator (lhs)PMI Composite Output Index (rhs)3-month moving average (ma)3-month maGraph 1.5: Economic Sentiment Indicator and PMI Composite Output, euro areaSource:EC, Markit Group Limited-25-20-15-10-50510-4-3-2-1012340809101112131415161718Retail trade volume, 3 mma (lhs)Retail confidence (rhs)y-o-y%balanceGraph 1.6: Retail trade volumes and retail confidence, euro area 
 
                                                           
 
                                                           
scenario  takes  into  account  only  the  actions  that 
took  place  before  the  cut-off  date  (3  July),  and 
does not incorporate any further escalation of trade 
tensions. The direct economic impact of the policy 
measures implemented so far has been limited, but 
their indirect effects on confidence are set to weigh 
on  investment  decisions,  particularly  in  export-
oriented sectors and countries (see technical box). 
These  concerns  come  on  top  of  the  recent  de-
synchronisation  of  global  momentum  and  in  a 
context  where  the  liquidity  provided  by  major 
central  banks  is  about  to  peak,  and  global  yields 
have started to rise. Furthermore, the recent bout of 
political uncertainty in a number of Member States 
and  the  increase  in  oil  prices  are  set  to  weigh  on 
economic  activity.  Moreover,  capacity  constraints 
are  expected 
to  become  progressively  more 
binding in a number of Member States, dampening 
the growth outlook.  

…but fundamentals remain sound… 

However,  the  fundamentals  for  above-potential 
growth  remain  in  place.  The  European  economy 
continues  to  benefit  from  supportive  monetary 
conditions, with low financing costs for companies 
and governments despite the gradual withdrawal of 
monetary  stimulus;  brightening  labour  market 
conditions;  as  well  as  improving  corporate  and 
sheets.  Unless  business 
household  balance 
sentiment  changes  significantly,  rising 
labour 
utilisation should lead firms to focus on additional 
capital spending in order to increase supply. Even 
though  tighter  labour  markets  in  a  number  of 
Member States may limit the pace of employment 
growth,  they  are  likely  to  spur  investment  in 

F. Ghironi  (2018).  ‘Protectionism  and  the  business  cycle’. 
NBER Working Paper 24353. February.  

Summer 2018 (Interim) forecast 

technology  and 
productivity growth.  

training  and 

thereby  support 

…with domestic demand remaining robust… 

Domestic demand is set to remain the main growth 
engine.  Looking  ahead,  private  consumption  is 
forecast to continue expanding at a solid pace. The 
improvement  in  labour  market  conditions,  as 
reflected  in  continued  employment  gains  and 
higher  wages,  are  set  to  continue  bolstering 
household  disposable  income.  Furthermore,  the 
aggregate household balance sheet remains in solid 
shape  with  net  worth  levels  rising  on  the  back  of 
rising house prices and past stock market gains. (7) 
However,  household  spending  growth  is  expected 
to slow, as labour market improvements moderate 
this year and next and oil prices rise.  

Investment  growth  is  expected  to  remain  robust 
but  to  moderate  gradually.  Favourable  financing 
conditions,  increasing  capacity  constraints  and 
corporate  profitability  will  continue  to  support 
business  investment.  The  continued  dynamism  in 
housing markets should  further support residential 
investment, driven by increasing real house prices, 
favourable  income  prospects  and  low  nominal 
interest  rates,  despite  the  challenges  posed  by 
demographic  factors. (8)  Also,  the  Investment  Plan 
for  Europe  should  continue  to  boost  business 
investment by improving access to finance. (9) The 
impact  of  these  supportive  factors,  however,  is 
likely 
to  be  partially  offset  by  uncertainty 
regarding  the  external  environment,  through  both 
its direct impact on current demand, as well as on 
future demand prospects. (10) 

(8) 

(7)  C.  Guerrieri  and  C.  Mendicino  (2018).  ‘Wealth  effects  in 
the euro area’. ECB Working Paper Series 2157. June. 
Its leading properties to the economic cycle give increased 
backing  to  the  narrative  on  the  economic  outlook.  See  E. 
Kholscheen,  A.  Mehrotra  and  D.  Mihaljek  (2018). 
‘Residential  investment  and  economic  activity:  evidence 
from the past five decades’. BIS Working Papers 726. June. 
and  E.  Monnet  and  C.  Wolf  (2017).  ‘Is  demographics  the 
housing cycle?’. Banque de France,  Rue de la Banque 41. 
April. 

(9)  As of June 2018, operations approved under the Investment 
Plan  for  Europe  were  expected  to  trigger  €294  billion  in 
investments.  Around  644,000  small  and  medium-sized 
businesses are expected to benefit from improved access to 
finance. 

(10)  Uncertainty  arises  when  economic  agents  cannot 
reasonably assess the likelihood of all possible future states 
of nature or characterise the probability distribution of their 
possible impacts. The real options channel suggests that the 
option  value  increases  with  uncertainty  in  the  case  of 
irreversible investment or consumption decisions. See ECB 
(2016).  ‘The  impact  of  uncertainty  on  activity  in  the  euro 
area’. Economic Bulletin 8. December.  

7 

-3-2-1012310111213141516171819Graph 1.7: Real GDP and its components, euro areaPrivate consumptionGovernment consumptionInvestmentInventoriesNet exportsGDP (y-o-y%)forecastpps. 
 
                                                                                   
                                                           
Summer 2018 (Interim) forecast 

…despite rising risks. 

Assuming  no  further  escalation  of  trade  tensions, 
euro area export growth is expected to slow down 
gently.  Overall,  global  GDP  is  still  expected  to 
expand at a robust pace, and world import growth 
is  still  likely  to  ease  only  modestly.  The  lagged 
impact  of  the  past  appreciation  of  the  euro  since 
early-2017,  however,  is  likely  to  constrain  further 
market share gains. 

Overall,  euro  area  GDP  is  forecast  to  continue 
growing  in  2018  but  at  a  slightly  slower  pace 
compared  to  2017  (2.1%  and  2.4%  respectively) 
and  to  the  pace  expected  in  spring.  It  is  set  to 
moderate  further  to  2.0%  in  2019  as  supply-side 
constraints  gradually  dent  the  growth  momentum, 
foreign  demand  slows,  and 
the  uncertainty 
surrounding  the  outcome  of  the  Brexit  transition 
agreement weighs on confidence.  

While  all  Member  States  are  forecast  to  continue 
experiencing  an  economic  upswing,  those  that 
have  grown  at  above-average  rates  over  the  last 
two  years  are  set  to  continue  outperforming, 
whereas  the  remaining  countries  are  forecast  to 
continue  expanding  at  below-average  rates,  with 
the notable exception of Greece, which is forecast 
to  grow  much  above  its  previous  average (11)  (see 
Graph 1.8). 

(11)  Greece  will  conclude  its  ESM  programme  on  20  August. 
See  Eurogroup  (2018).  ‘Eurogroup  statement  on  Greece’. 
Press release 390/18. June. 

8 

1.4. 

LABOUR  MARKET  CONDITIONS  SET  TO 
CONTINUE IMPROVING  

The  labour  market  situation  in  the  euro  area 
continued  to  improve  in  the  first  half  of  2018. 
Employment  rose  by  0.4%  quarter-on-quarter  in 
2018-Q1 and  was 1.4% higher than one  year ago. 
The  number  of  employed  persons  reached  a  new 
historical  high.  The  long  period  of  employment 
growth  was  accompanied  by  a  rebound  in  the 
number  of  total  hours  worked  in  the  economy.  In 
2018-Q1  they  increased  by  0.2%  quarter-on-
quarter  to  the  highest  level  since  2008-Q4.  The 
slower  growth  of  hours  worked  as  compared  to 
persons  employed  reflects  the  rise  in  part-time 
workers over recent years, but also changes in the 
composition of employment due to structural shifts 
across  sectors.  Many  part-time  workers  have 
identified themselves as involuntarily working less 
than  full time,  which is reflected in developments 
of  broader  underemployment 
that 
continue to suggest that some slack remains in the 
labour  market.  Labour  market  slack  has  been 
receding  as  the  market  has  improved  and  labour 
shortages  have  arisen  in  several  sectors  in  some 
Member  States.  Labour  shortages  have  also 
become  visible  in  the  job  vacancy  rate,  which 
moved  up  in  the  first  quarter  to  2.1%,  its  highest 
level  in  the  history  of  the  series  (since  2006). 
Reflecting  the  gradual  tightening  of  the  labour 
market,  the  unemployment  rate  in  the  euro  area 
declined  to  8.4%  in  April  2018  and  stabilised  at 
that level in May, its lowest level since December 
2008. 

indicators 

Employment  creation  continued  to  be  strong 
considering the pace of economic expansion. Both 
in  terms  of  employment  and  unemployment, 
labour market conditions have improved across all 
significant 
States.  Nevertheless, 
Member 
differences remain.  

In 

the 

June, 

Survey 
indicators  of  companies’  employment 
expectations retreated somewhat in early 2018 but 
remain  well  above  their  long-term  averages  (see 
Graph 1.9). 
the 
Commission's  Business  and  Consumer  Surveys 
were consistent  with continued job creation in the 
coming months, with the unemployment rate set to 
continue  falling.  The  marginally  slower  pace  of 
economic  growth  now  expected  should  have  little 
impact on the labour market outlook. 

readings 

in 

BEDEEEELESFRITCYLVLTLUNLATPTSISKFIEA0.00.51.01.52.02.53.03.54.04.50.00.51.01.52.02.53.03.54.04.52018-20192016-2017Graph 1.8: Real GDP growth, euro area and Member States, 2016-2017 versus 2018-2019Note: MTand IEare excludedfrom the  calculation of  the euro area average and  are not displayed. 
 
                                                           
Graph 1.9: Employment expectations, 
DG ECFIN surveys, euro area

level

level

-10

0

10

20

30

40

50

60

70

30

20

10

0

-10

-20

-30

-40

-50

09

10

11

12

13

14

15

16

17

18

Employment exp. in industry, next 3 months (lhs)

Employment exp. in services, next 3 months (lhs)

Consumers' unempl. exp., next 12 months (inverted, rhs)

1.5. ENERGY PRICES DRIVE INFLATION HIGHER 

IN THE NEAR TERM 

from 

Headline  inflation  in  the  euro  area  edged  up, 
particularly  in  the  second  quarter  2018,  on  the 
back  of  higher  energy  prices.  Inflation  jumped  to 
1.9% in May and is estimated at 2% in June. This 
was a substantial pick-up from the average of 1.3% 
in  the  first  quarter  of  2018  (see  Graph 1.10). 
Although  this  was  to  an  extent  expected,  given 
base  effects 
last  year’s  energy  price 
developments, the continued  rise in oil prices and 
the  drop  in  the  euro  exchange  rate  against  the 
dollar  have  added  further  upward  pressure  on 
energy  prices  and  led  to  higher-than-expected 
inflation.  Indeed,  energy  inflation  is  estimated  at 
8% in June, compared to 6.1% in May. The second 
quarter  figures  were  also  driven  higher  by 
unprocessed  food  prices, 
in  particular  major 
cereals and dairy. 

Graph 1.10: HICP, euro area

index, 2015=100
1.7

1.7

1.5

forecast

1.3

0.4

0.0

0.2

2.5

2.7

%

1.6

3

2

1

0

-1

104

100

96

92

10

11

12

13

14

15

16

17

18

19

HICP inflation (annual rate) (lhs)

HICP index (monthly) (rhs)

HICP index (annual) (rhs)

Figures next to horizontal bars are annual inflation rates.

On the other hand, core inflation – which excludes 
energy  and  unprocessed  food  prices  –  has 

Summer 2018 (Interim) forecast 

remained muted with no discernible trend so far in 
2018. It averaged 1.2% in the first quarter and was 
estimated  at  the  same  rate  in  June.  Services 
inflation  exhibited  some  volatility  due  to  the 
timing of Easter (in late March vs. April last year), 
which  affected  the  prices  of  package  holidays, 
accommodation and transport. On the whole, non-
energy  industrial  goods  inflation  has  remained 
stable  so  far  this  year.  The  muted  underlying 
inflation rate reflects the lagged negative impact of 
a prolonged period of low inflation and weak wage 
dynamics. 

Recent wage developments show a pick-up… 

Recent wage indicators in the euro area, however, 
show  signs  of  a  gradual  pick-up.  The  annual 
growth  of  both  nominal  compensation  per 
employee and negotiated wages registered notable 
increases  in  the  first  quarter  of  1.9%  and  1.8% 
respectively.  Compensation  per  hour  worked  also 
increased strongly, from 1.5% in 2017-Q4 to 1.9% 
in  2018-Q1.  Meanwhile,  prices  along  industrial 
supply  chains  are  also  contributing  to  rising 
pressure in underlying inflation, with the growth of 
industrial  producer  prices  having  edged  up  to  the 
3% mark in May. 

…supportive of a gradual increase in core 
inflation. 

in 

Headline  inflation  in  the  euro  area  is  forecast  to 
remain around current levels in 2018, provided that 
oil  prices  remain  close  to  the  current  assumptions 
based  on  futures  markets.  Overall,  headline 
inflation  is  forecast  to  average  1.7%  over  2018, 
0.2 pps. higher than in the spring forecast. Then, in 
2019, the impact of energy inflation should slowly 
taper  out,  leading  to  some  moderation  in  the 
headline  rate 
the  year. 
Underlying inflation is then expected to gradually 
labour  markets  progressively 
gather  pace,  as 
tighten 
recent 
developments in wage growth underpin and drive a 
good part of the inflation outlook, as wage growth 
is  a  key  determinant  of  domestic  price  pressures, 
especially  services 
inflation,  which  has  been 
subdued until recently. In 2019, headline inflation 
is  expected  to  average  1.7%,  also  slightly  higher 
than previously expected. 

the  first  half  of 

and  wages 

fact, 

rise. 

In 

Market-based  measures  of  inflation  expectations 
have  continued  to  recover  since  spring  and  the 
beginning of the year, but mainly in the short-term 
spectrum.  At  the  cut-off  date  of  this  forecast, 

9 

 
 
 
Summer 2018 (Interim) forecast 

forward 

inflation-linked swap rates at the one-year forward 
one-year-ahead  horizon  stood  at  around  1.4%. 
Swap  rates  at  the  three-year  forward  three-year-
ahead  horizon  imply  an  average  inflation  of  close 
to 1.6%. On a longer horizon, the widely watched 
five-year 
indicator 
five-year-ahead 
inflation  of  1.7%  (see  Graph 1.11). 
suggests 
Moreover,  the  ECB’s  April  2018  Survey  of 
Professional Forecasters includes inflation forecast 
means  of  1.5%  in  2018  (unchanged,  compared  to 
the  2018-Q1  exercise),  1.6%  in  2019  (down  by 
0.1 pps.)  and  1.7%  in  2020  (down  by  0.1 pps.). 
Longer-term 
stood 
unchanged at 1.9%. 

expectations 

inflation 

possible further escalation of trade disputes driven 
by  the  US,  the  potentially  disruptive  effect  of 
increased 
tighter 
imbalances stemming from the highly pro-cyclical 
fiscal policy in the US.  

financing  conditions,  and 

in 

countries 

Since  the  spring,  trade  tensions  have  further 
escalated. This forecast takes into account what is 
already 
implemented,  but  several  additional 
protectionist  measures  are  being  considered  and 
would probably trigger retaliation if implemented. 
Further escalating trade conflicts would negatively 
affect  welfare 
involved. 
all 
Restrictions  to  foreign  trade  and  foreign  direct 
investment would lower productivity. A disruption 
of  global  supply  chains  could  have  a  highly  non-
linear  effect  on  world  trade  volumes.  In  the  near 
term, trade disputes could have a sizeable indirect 
impact on domestic investment through confidence 
effects  –  already  seen  to  some  extent  in  the 
tradable goods sector in the first half of 2018 - and 
increased  uncertainty.  In  the  longer  term,  the 
European  and  global  economy  would  also  likely 
suffer  from  a  further  undermining  of  open  rules-
based multilateralism.  

1.6. 

RISKS TILTED TO THE DOWNSIDE  

Overall,  even  though  some  of  the  risks  identified 
in  April  have  materialised,  the  balance  of  risks 
remains  clearly  tilted  to  the  downside.  This  is 
particularly the case beyond the very short term, as 
some downside risks have increased, notably those 
related to escalating trade protectionism. 

investment  and  efforts 

On  the  upside,  rising  supply  constraints  could 
to 
trigger  additional 
increase productivity; and additional labour supply 
could emerge from among the underemployed and 
the  inactive.  Given  the  prominent  role  played  by 
supply-shocks  in  driving  oil  prices  over  the 
previous  year (12),  oil  prices  could  turn  out  lower 
than  assumed  on  the  back  of  a  recent  OPEC 
agreement  and  the  price-responsiveness  of  US 
shale oil production. 

Downside  risks  to  the  growth  outlook,  however, 
clearly dominate. They are mainly on the external 
side  and  concern  the  dangerous  nexus  between  a 

(12)  ECB (2018). ‘Are the recent oil price increases set to last?’. 
ECB Economic Bulletin 2, pp. 36-40, March. (Box 1) 

The  expected  further  divergence  of  monetary 
policies  in  2019  may  not  be  fully  priced  in  by 
financial  markets  yet,  and  could  lead  to  a  sharper 
tightening of global financial conditions. Volatility 
in  global  financial  markets  could  increase  further 
in  a  context  of  relatively  high  equity  valuations 
and  rising  treasury  yields,  impacting  financing 
conditions also in the euro area. (13) If this were to 
lead  to  diminished  risk  appetite  globally,  there 
could  be  significant  spillovers  in  terms  of  capital 
flows  and  financial  market  stability.  As  shown 
over  the  second  quarter  of  the  year,  emerging 
market  economies (14),  including  China,  where 
public  and  private  leverage (15)  have  increased 
markedly  in  recent  years,  would  be  particularly 
vulnerable to changing market conditions.  

Also, political and policy  uncertainty  in a number 
of  EU  countries  remains  an  important  downside 
risk to the forecast. This includes the  risks related 
to the outcome of the negotiations on the terms of 
the  UK’s  withdrawal  from  the  EU  in  March 

(13)  BIS  (2018).  ‘The  risks  ahead’.  Annual  Economic  Report, 

pp. 12-20. June. 

(14)  L.  Menna  and  M.  Tobal  (2018).  ‘Financial  and  price 
stability in emerging markets: the role of the interest rate’. 
BIS Working Papers 717. May. 

(15)  See World Bank (2018). ‘Corporate debt: financial stability 
and investment implications’. Global Economic Prospects. 
June. 

10 

0.00.51.01.52.02.53.0101112131415161718%Maturity dateGraph 1.11: Inflation expectations derived from implied forward inflation-linked swap rates5 years forward 5 years ahead3 years forward 3 years ahead1 year forward 1 year aheadSSource: Bloomberg 
 
                                                           
                                                           
Summer 2018 (Interim) forecast 

2019  (16),  in  particular  if  the  outcome  differs 
meaningfully  from  the  technical  assumption  of 
status quo in terms of trading relations between the 
EU27 and the UK for 2019. 

 The  relevance  of  downside  risks  related 
to 
geopolitical  tensions  in  the  Korean  peninsula 
appears  to  have  faded,  although  they  remain  high 
in  the  Middle  East.  Were  these  risks  to  increase, 
supply-side pressures on oil prices could intensify.  

(16)  See  Box 1  on  .the  technical  assumption  regarding  trading 
relations  between  EU27  and  the  UK  for  the  current 
forecast. 

11 

 
                                                           
Summer 2018 (Interim) forecast 

2. 

PROSPECTS BY MEMBER STATES 

2.1. 

BELGIUM 

GDP  growth  abated  slightly  in  2018-Q1  to  0.3% 
(q-o-q)  due  to  slower  private  sector  investment 
growth  and  a  fall  in  inventories.  Soft  indicators 
have deteriorated in recent months, suggesting that 
this  soft  patch  may  have  continued  in  2018-Q2. 
indicators  remain  high, 
However,  confidence 
suggesting that growth should pick up again in the 
second half of the year.  

For  2018  as  whole,  Belgium’s  GDP  growth  is 
forecast  to  remain  stable  at  1.7%  driven  by 
sustained  private  demand  amid  improving  labour 
market and investment conditions. In 2019, growth 
is forecast to ease to 1.6%, as investment growth is 
expected to weaken gradually.  

The contribution of private investment to growth is 
expected  to  increase  in  2018  but  weaken  from 
2019.  Household  investment  is  projected  to  rise 
moderately as interest rates are expected to remain 
low.  Business  investment  is  also  expected  to 
increase,  amid  favourable  financing  conditions, 
improved  profitability  and  elevated  capacity 
utilisation  rates.  Public  investment  is  expected  to 
continue growing in 2018, driven by infrastructure 
and  defence  projects  and  by  the  local  election 
investment  cycle.  However,  its  contribution  to 
growth is set to reduce slightly from 2019, in line 
with  contained  public  expenditure.  Net  exports 
contributed  positively  to  growth  in  2017,  but 
should be neutral over the forecast horizon. 

After having picked up to 2.2% in 2017, inflation 
(HICP) is expected to decline to 1.9% in 2018 and 

12 

1.6%  in  2019.  The  upwards  revision  to  the 
inflation forecast since the spring is mostly due to 
the recent increase in oil prices, which should have 
its  main  impact  in  the  second  half  of  2018.  Core 
inflation  is  expected  to  remain  close  to  its  2017 
level  of  1.6%  over  the  forecast  horizon.  Nominal 
wage  growth  is  projected  to  rise  moderately 
through  indexation,  although  labour  cost  growth 
should  be  contained  thanks  to  cuts  in  labour 
taxation.  The  inflation  gap  with  the  euro  area  is 
expected to close in 2019. 

2.2. 

BULGARIA 

Real GDP growth reached 0.9% (q-o-q) in the first 
last  year’s 
quarter  of  2018,  maintaining 
momentum when the economy grew by 3.6%. The 
ongoing  expansion  is  being  driven  by  strong 
private consumption and higher investment. Wage 
increases  continued  to  boost  private  consumption, 
while  a  recovery  in  the  use  of  EU  investment 
funding  programmes  is  fuelling  the  growth  of 
public  investment.  Economic  sentiment  continues 
to  improve  and  survey  data  show  expectations  of 
increasing  orders,  higher  output  and  greater 
demand,  which  suggests  that  the  economy  should 
continue expanding in the coming quarters.  

demand.  Positive 

Real  GDP  growth  is  forecast  to  remain  robust  at 
3.8% in 2018 and 3.7% in 2019, driven mainly by 
domestic 
labour  market 
developments  and  planned  wage  increases  in  the 
public sector should provide the fuel for continued 
private consumption growth. Investment growth is 
also expected to be strong over the forecast period, 
mainly due to the recovery in EU funds absorption, 
but also due to stronger private sector investment. 
At the same time, the contribution from net exports 
to GDP is expected to be negative. Although solid 
external  demand  should  support  export  growth, 
strong domestic consumption and investment mean 
that imports will continue to outweigh exports. 

Price pressures increased in the spring months as a 
result of a steep rise in oil prices and second round 
effects  on  food  prices.  Administered  prices  were 
also  raised  significantly  over  the  same  period. 
HICP inflation  is thus expected to rise to 2.0% in 
2018  before  slowing  down  to  1.8%  in  2019.  This 
pattern  is  mainly  due  to  a  strong  base  effect  in 
energy  products,  while  the  rise  in  real  disposable 

-1.0-0.50.00.51.01.52.02.53.03.510111213141516171819Graph 2.1: Belgium -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
incomes  should  provide  continued  support  to 
consumption and prices generally. 

Summer 2018 (Interim) forecast 

After a temporary slowdown in the first months of 
2018, headline inflation is expected to return above 
2%  in  the  coming  quarters,  influenced  by  the 
positive output gap, wage dynamics, and oil prices. 
The gradual increase of interest rates by the Czech 
National Bank, whose latest hike at the end of June 
raised  the  policy  rate  by  25 bps.  to  1.0%,  should 
help  temper  inflationary  pressures  and  maintain 
consumer price inflation close to the target of 2%. 
HICP inflation is forecast to average 2.1% in 2018 
and 2.0% in 2019. 

2.3.  CZECH REPUBLIC 

The economy of the Czech Republic expanded by 
4.3%  in  2017,  its  second  fastest  rate  in  a  decade. 
All  demand  components  contributed  positively  to 
GDP  growth.  Despite  an  easing  of  the  pace  in 
2018-Q1  due  to  weak  external  demand  in  key 
trading partners, GDP growth is forecast at a solid 
rate  of  3.0%  for  2018  and  2.9%  in  2019,  thanks 
mainly to robust domestic demand. The  very high 
confidence indicators readings seen in the first half 
of 2018 are fully consistent with these prospects. 

is  also  expected 

Wage  increases  and  high  levels  of  consumer 
confidence  should  continue  to  support  private 
to 
consumption.  Investment 
remain  vigorous,  underpinned  by  a  revival  of 
construction activity, greater use of EU investment 
funding,  and  a  general  trend  towards  industrial 
automatisation. Meanwhile, public consumption is 
set to continue growing at a steady pace, supported 
by robust wage growth in the public sector.  

On  the  downside,  net  exports  are  likely  to  detract 
from  GDP  growth,  particularly  in  2018.  The 
intensity  and  duration  of  this  effect  will  hinge  on 
world trade developments and economic growth in 
the  euro  area,  particularly  in  Germany.  Labour 
shortages,  which  are  increasingly  cited  as  a 
production  constraint,  also  pose  a  growing  risk  to 
the  economy.  The  number  of  job  vacancies  was 
almost twice as large as the number of unemployed 
persons  in  2018-Q1.  Continued  rapid  house  price 
inflation, coupled with rising household debt, also 
constitutes a vulnerability. 

2.4.  DENMARK 

Real  GDP  growth  of  0.4%  (q-o-q)  in  the  first 
quarter  of  2018  was  somewhat  weaker  than 
expected in spring.  Service  exports dragged down 
economic  growth  despite  rising  world  trade  and 
strong demand in Denmark’s main export markets. 
On the other hand, private consumption turned out 
to  be  stronger  than  expected  due  to  the  release  of 
pent-up demand  for cars following changes in car 
taxation at the end of last year.  

Economic growth in Denmark is forecast to reach 
1.6%  in  2018  and  1.8%  in  2019  after  growth  of 
2.3%  in  2017.  While  the  growth  momentum  is 
expected to remain solid, headline growth in 2018 
is  negatively  affected  by  the  carry-over  of  a  large 
one-off  transaction  linked  to  the  sale  of  a  Danish 
patent  (about  0.4%  of  GDP  recorded  as  a  service 
export)  in  2017.  Robust  private  consumption  is 
expected  to  help  sustain  the  upswing  over  the 
forecast  horizon.  Supported  by  rising  housing 
prices,  residential  construction  is  set  to  remain  an 
important driver of investment growth in 2018 and 
2019.  

13 

-6.0-4.0-2.00.02.04.06.08.010111213141516171819Graph 2.2: Bulgaria -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-3.0-2.0-1.00.01.02.03.04.05.06.010111213141516171819Graph 2.3: Czech Republic -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

have 

trade  would 

Risks to the forecast are gathering. As a small open 
economy  with a large  shipping  sector, frictions in 
negative 
world 
repercussions  on  Danish  exports  and  investment. 
Deteriorating  sentiment  indicators  and  weakening 
prospects  in  Denmark’s  export  markets  could 
impact  Danish  exports  and  business 
rapidly 
investment. 

large 

Despite  the  solid  economic  performance  and  a 
tightening labour market, consumer prices (HICP) 
are  expected  to  rise  by  only  0.9%  in  2018  after 
increasing  by  1.1%  in  2017.  Inflation  is  revised 
slightly  upwards  both  in  2018  and  2019  due  to 
higher energy prices. Despite rising energy prices, 
inflation will decelerate in 2018 mainly because of 
the 
the 
appreciation of the krone. Rising service prices and 
the waning impact of the tax changes are expected 
to lift HICP inflation to 1.5% in 2019. 

impact  of 

taxes  and 

indirect 

lower 

business  confidence  across  the  globe  and  thus 
dampen global investment demand which is likely 
contributing  to  the  growing  concerns  of  German 
exporters. 

Business  investment  grew  strongly  in  the  first 
quarter,  in  response  to  the  steady  rise  in  capacity 
utilisation  rates.  Some  businesses,  however,  are 
likely  to  hold  back  on  investment  due  to  growing 
uncertainty  over  trade  policies  and  their  possible 
impact  on  global  value  chains.  By  contrast, 
housing 
investment  has  proven  resilient  and 
positive  data  on  residential  construction  permits 
and  still  robust  business  sentiment  in  the  sector 
indicate that construction activity is likely to keep 
rising. 

Willingness to hire remains high and vacancy rates 
are  still  on  the  rise.  The  strong  labour  market 
conditions  and  solid  wage  growth  should  benefit 
private  consumption  and  continue 
to  sustain 
growth. Public consumption growth is expected to 
resume later in the year, as the 2018 budget, which 
was  only  just  approved,  is  implemented.  Overall, 
real  GDP  is  now  expected  to  increase  by  1.9%  in 
2018 and 2019, a downward revision compared to 
the spring. Risks are tilted to the downside. Global 
trade  policy  uncertainty  could  affect  the  highly 
open German economy more strongly. 

2.5.  GERMANY 

Germany’s GDP growth slowed from 0.6% in late 
2017  to  0.3%  in  the  first  quarter  of  2018. 
Investment and private consumption held up well, 
but  public  consumption  and  exports  declined 
significantly. Net exports contributed negatively to 
GDP growth with both exports and imports falling. 
The  weak  foreign  trade  results  of  the  first  quarter 
follow an exceptionally  strong performance in the 
preceding  quarter.  Nevertheless,  overall  economic 
sentiment  has  cooled  since  the  start  of  the  year, 
suggesting  deteriorating 
foreign  demand  and 
possible  investment  and  consumption  restraint  in 
the  coming  quarters.  Survey  data  point  to  a 
moderation of order inflows and industrial activity. 
Escalating  protectionism  would  likely  weigh  on 

14 

After having picked up to 1.7% in 2017, inflation 
(HICP) is expected to remain broadly at this level 
in  2018  and  edge  up  in  2019,  reflecting  factors 
such as energy prices and a higher minimum wage, 
which  could  affect  services 
inflation.  Core 
inflation  is  expected  to  move  in  parallel  to  reach 
1.6% in 2019. 

-1.5-1.0-0.50.00.51.01.52.02.53.03.510111213141516171819Graph 2.4: Denmark -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-3.0-2.0-1.00.01.02.03.04.05.010111213141516171819Graph 2.5: Germany -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

2.6. 

ESTONIA  

2.7. 

IRELAND 

Estonia’s  GDP  growth  peaked  at  4.9%  in  2017, 
driven  by  strong  investment  and  a  favourable 
external  environment.  Economic  growth  slowed 
more than expected in 2018-Q1 to -0.1% (q-o-q) or 
3.8%  (y-o-y).  The  main  reason  for  the  slowdown 
was weak growth in investment and goods exports. 
At  the  same  time,  domestic  demand  was  strong, 
upheld by private consumption and construction. 

Economic  sentiment  remains  positive  but  has 
trended  downwards  in  the  first  half  of  2018. 
Looking  forward  though,  economic  growth  is 
forecast to remain relatively robust, supported by a 
labour  market.  Buoyant  consumption 
strong 
growth 
income, 
reflects  growing  disposable 
although  a  notable  part  of  the  income  increase  is 
being  directed  to  savings.  Overall,  real  GDP  is 
expected to grow by 3.5% in 2018 and to slow to 
2.7%  in  2019,  in  line  with  moderating  domestic 
demand  and  a  less  favourable  external  outlook. 
Downside  risks  are  mainly  related  to  the  external 
environment,  but  also  to  labour  shortages  and  to 
rising  unit  labour  costs,  which  could  result  in 
lower-than-expected exports, even if the economic 
growth in the rest of the euro area is sustained. 

HICP inflation peaked at 3.7% in 2017 on the back 
of  rising  energy  and  food  prices  as  well  as 
sequential  hikes  in  indirect  taxation.  Inflation  is 
expected  to  abate  only  gradually  to  2.9%  in  2018 
and 2.7% in 2019. The projected downward trend 
of  inflation  this  year  and  next  reflects  a  lower 
impact  from  consumption 
tax  rises  and  an 
expected stabilisation of food prices. These factors 
increases  in  global 
should  outweigh  possible 
energy prices and wages. 

labour  market  and 
the 
Encouragingly,  both 
construction  investment  have  maintained  their 
strong  momentum  in  the  first  half  of  2018. 
Employment  recovered  its  pre-crisis  levels  in 
2018-Q1  and  unemployment  continues  to  fall. 
Household  real  disposable  income  continues  to 
grow,  driven  by  robust  growth 
in  full-time 
employment,  rising  wages  and  low  inflation, 
thereby  also  supporting  consumer  confidence. 
Total  construction  output  increased  by  20.6%  in 
2018-Q1  on  an  annual  basis,  though  from  low 
levels.  Planning  permissions  for  residential  units 
grew  by  80.8%  in  2018-Q1  (y-o-y)  and  the 
construction PMI remains high.  

trade  and 

Headline 
investment  figures  have 
recently been  very volatile and heavily  influenced 
by the activities of multinational companies. While 
the outlook for the euro area slightly worsened, the 
overall external economic environment is expected 
to remain broadly supportive of Irish exports over 
the forecast horizon. 

is  projected 

Domestic  economic  activity 
to 
continue growing at a solid pace in the short term. 
The  strong  momentum  in  the  labour  market  is 
expected  to  further  support  private  consumption. 
Investment in construction is forecast to expand at 
a  brisk  pace  driven  by  the  housing  shortage  and 
various  government  policy  measures.  As  a  result, 
real  GDP  is  estimated  to  grow  by  5.6%  in  2018 
and  4.0%  in  2019,  with  domestic  demand  as  the 
main contributor.  

HICP  inflation  remained  subdued  in  the  first  five 
months  of  2018,  dragged  down  by  lower  import 
prices  due  to  the  appreciation  of  the  euro  against 
sterling. HICP inflation is projected to reach 1.0% 
in 2018 and to rise to 1.3% in 2019, mainly driven 
by  higher  energy  and  services  prices,  as  a  further 
tightening  in  the  labour  market  is  expected  to  put 
upward pressure on wages. 

Risks  to  the  macroeconomic  outlook  are  tilted  to 
the  downside.  Uncertainty  relates  primarily  to  the 
ongoing negotiations between the UK and the EU. 
As a highly open economy, Ireland is particularly 
exposed  to  changes  in  the  international  taxation 
and trade environment.  Activities of  multinational 
companies  could  swing  headline  GDP  growth  in 
either direction. 

15 

-6.0-4.0-2.00.02.04.06.08.010.012.010111213141516171819Graph 2.6: Estonia -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
Summer 2018 (Interim) forecast 

remainder  of  the  year,  as  increased  investment 
activity  should  generate  additional  demand  for 
goods imports. 

to 

labour  market  continues 

The 
improve. 
Unemployment fell to 20.1% in March 2018, down 
0.7 pps. since the end of 2017, while employment 
grew  by  almost  2%  in  the  first  three  months  of 
2018.  This 
to  continue 
trend 
throughout the year. 

is  expected 

Consumer  price  inflation  reached  0.8%  in  May, 
with  an  average  of  0.4%  for  the  first  five  months 
of  the  year,  driven  mainly  by  higher  processed 
food  and  energy  prices.  Due  to  higher  oil  price 
assumptions,  the  forecast  for  headline  inflation  is 
revised slightly upwards. 

2.9. 

SPAIN 

Spain’s  economy  grew  by  3.1%  in  2017  and 
continues  to  show,  so  far,  little  sign  of  slowing 
down. GDP expanded by 0.7% (q-o-q) in 2018-Q1, 
unchanged  from  the  two  previous  quarters.  Both 
soft  and  hard  indicators,  including  administrative 
employment  data,  point  to  a  similar  expansion  in 
2018-Q2.  The  composition  of  growth  in  the  first 
quarter  reveals  weaker-than-expected  net  exports 
and  non-construction 
investment,  which  were 
offset  by  strong  consumption  and  residential 
construction.  

Over 
the  forecast  horizon,  consumption  and 
construction investment are expected to remain the 
most  dynamic  demand  components.  The  higher-
than-anticipated rise in oil prices since the spring is 
expected  to  have  a  negative  impact  on  domestic 
demand in 2018 and, to a lesser extent, in 2019. In 

2.8.  GREECE 

Greece’s  economy  got  off  to  a  strong  start  in  the 
first  quarter  in  2018.  Following  the  successful 
conclusion  of  the  ESM  programme,  the  economic 
recovery  is  expected  to  continue  in  the  coming 
years,  as  long  as  commitments  to  reforms  are 
upheld. 

According  to  provisional  data,  real  GDP  growth 
reached  0.8%  (q-o-q)  in  the  first  quarter  of  2018 
(in  seasonally  and  working-day  adjusted  terms), 
which  corresponds  to  a  growth  rate  of  2.3% 
(y-o-y). This confirms that the slowdown to 0.2% 
the  fourth  quarter  of  2017  was 
(q-o-q) 
temporary and that Greece is indeed recovering. 

in 

In the first quarter of 2018, growth  was led by net 
exports which contributed 1.4 pps. (q-o-q) to GDP 
growth.  This  was  a  result  of  both  rising  exports 
and  decreasing 
imports.  Private  consumption 
registered an increase for the first time since 2016, 
but its growth contribution was cancelled out by a 
decrease 
total 
consumption  remained  almost  flat  (0.1%).  There 
was  a  large  decline  in  investment,  which  shaved 
off  2.4 pps.  from  GDP  growth.  However,  the 
decline was expected following the strong one-off 
growth in the preceding quarter. 

in  public  consumption,  hence 

Real GDP is forecast to reach 1.9% in 2018 and to 
accelerate further to 2.3% in 2019. The main driver 
of  growth  is  expected  to  be  investment,  which  is 
rising  on  the  back  of  the  improving  business 
environment 
direct 
investment.  Private  consumption  is  expected  to 
remain  subdued,  while  the  contribution  of  net 
exports  is  set  to  be  more  moderate  over  the 

increased 

foreign 

and 

16 

-15.0-10.0-5.00.05.010.015.020.025.030.010111213141516171819Graph 2.7: Ireland -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.010111213141516171819Graph 2.8: Greece -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

2.10.  FRANCE 

Following upward revisions by INSEE in national 
accounts  outturns,  GDP  expanded  by  a  strong 
2.2%  in  2017  as  a  whole (17)  and  by  0.7%  in 
2017-Q4,  in  line  with  the  previous  two  quarters 
and  mainly  driven  by  strong  investment  and 
exports. However, GDP growth in the first quarter 
of  2018  slowed  markedly  to  0.2%  after  five 
quarters of strong expansion and both soft and hard 
indicators  deteriorated. The  slowdown  was  led  by 
a  decline  in  exports  and  the  deceleration  in 
corporate  investment.  Temporary  factors  such  as 
particularly  cold  weather  conditions  also  explain 
some of the slowdown.  

addition,  a  less  favourable  external  environment 
should  result  in  a  slightly  smaller  contribution  of 
net  exports  to  growth.  At  the  same  time,  the 
additional  expansionary  measures 
that  were 
included in the budget law for 2018 (approved on 
28  June,  after  the  cut-off  date  of  the  spring 
forecast)  are  expected  to  provide  an  additional 
boost  to  growth  in  2018,  mainly  via  private 
consumption.  Consumer  spending  should  also 
benefit 
real  wage 
growth and dynamic job creation over the forecast 
horizon.  The  net  effect  of  these  offsetting  factors 
on real GDP growth is slightly  negative for 2018, 
leading 
to  a  downward  revision  by  0.1 pps. 
compared  to  spring,  to  2.8%.  For  2019,  the  net 
the  forecast 
effect 
remaining at 2.4%. 

from  higher-than-expected 

is  broadly  neutral,  with 

Economic  activity,  which  has  also  been  slightly 
affected by strikes in the transport sector, is set to 
remain  moderate  in  2018-Q2,  with  quarter-on-
quarter  GDP  growth  of  0.3%.  While  order  books, 
service  sector  PMIs  and  the  Economic  Sentiment 
Indicator  started  to  improve  at  the  end  of  the 
has 
consumer 
second 
deteriorated.  Employment,  however,  is  set  to 
remain relatively resilient.  

confidence 

quarter, 

HICP inflation has been rising throughout the first 
half of the year, reaching 2.1% in May, driven by 
oil  price  developments.  It  is  expected  to  peak  in 
2018-Q3  and  then  moderate  to  an  annual  average 
of 1.8% in 2018 and 1.6% in 2019. Core  inflation 
is expected to gradually increase over the  forecast 
horizon, as the output gap turns firmly positive and 
wage  growth  in  the  private  sector  accelerates 
following the latest framework agreement between 
the social partners. 

Growth is set to gain momentum as of the second 
half  of  this  year,  with  GDP  growth  expected  to 
expand  by  1.7%  in  both  2018  and  2019.  The 
reduction  in  social  contributions  and  housing 
increases  and  resilient 
taxes,  projected  wage 
employment  growth  are  expected  to  have  a 
positive impact on household purchasing power in 
the  coming  months,  which  should  fuel  private 
consumption growth in the second half of 2018. In  

(17)  The GDP annual growth figures are non-calendar adjusted. 
In 2017, calendar adjusted GDP growth reached 2.3%. 

17 

-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.010111213141516171819Graph 2.9: Spain -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-1.5-1.0-0.50.00.51.01.52.02.510111213141516171819Graph 2.10: France -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
                                                           
Summer 2018 (Interim) forecast 

turn, the  expected growth uptick in the  rest of the 
euro  area  should  back  a  moderate  rebound  in 
exports as of the second half of the year. 

Inflation  is  expected  to  pick-up  further  in  2018. 
Core  inflation  is  projected  to  gain  momentum  in 
line  with  the  projected  uptick  in  wage  growth  but 
should 
is 
forecast to reach 1.9% this year but to fall back to 
1.5% in 2019, as the rise in oil prices abates. 

remain  contained.  HICP 

inflation 

2.11.  CROATIA 

Following  the  unexpected  slowdown  in  the  last 
quarter  of  2017,  real  GDP  growth  edged  up  only 
slightly in the  first quarter in 2018, mainly thanks 
to  robust  private  consumption  and  recovering 
investment.  Nevertheless,  and  despite  mixed 
signals  from  high  frequency  indicators,  positive 
labour  market  developments  and  survey  data 
suggest  that  domestic  demand  will  fuel  a  growth 
pick up over the rest of 2018.  

to 

Private  consumption  is  expected  to  remain  the 
main  driver  of  growth  throughout  the  forecast 
period,  supported  by  rising  household  disposable 
incomes and low inflation. An improved uptake of 
EU funds, decreasing interest rates and increasing 
credit  flows 
the  corporate  sector  should 
underpin  investment  growth.  Available  early  data 
on  tourist  arrivals  and  overnight  stays  support 
expectations of a strong growth of services exports 
in  2018.  At  the  same  time,  the  sudden  slowdown 
of  goods  exports  in  early  2018  is  in  line  with  the 
weakening  observed  in  the  manufacturing  sector. 
However,  the  impact  of  expected  lower  goods 
export  growth  on  GDP  should  be  partially  offset 
by  a  slowdown  in  import  growth,  as  domestic 
production is import intensive.  

Overall, real GDP growth is expected to moderate 
slightly over the forecast horizon to 2.6% in 2018 
and 2.5% in 2019. The settlement plan adopted by 
creditors on the debt restructuring of the country’s 
largest  employer,  Agrokor,  has  reduced 
the 
downward  risks  to  the  forecast  scenario,  but  the 
successful 
the  agreement 
remains  crucial  for  the  operational  and  financial 
stability of the company. 

implementation  of 

Labour  market  conditions  continue  to  improve. 
Wages  are  projected  to  continue  rising,  as  labour 
shortages  become  more  apparent  in  the  tourism 
and  construction  sectors.  The  unemployment  rate 

18 

should  continue  declining  mainly  thanks  to  rising 
employment,  as  outbound  migration  flows  slow 
down. In the first five months of 2018 inflationary 
pressures 
rising 
energy  prices.  Strong  consumer  spending  and 
rising  wages  are  expected  to  eventually  drive 
consumer  price  inflation  up  to  1.6%  in  2018  and 
1.8% in 2019.  

remained  contained,  despite 

2.12. 

ITALY 

Although Italy’s economy grew by 0.3% (q-o-q) in 
2018-Q1,  only  slightly  less  than  in  the  previous 
quarter,  it  did  not  fully  escape  the  general  loss  of 
growth  momentum  in  advanced  countries.  While 
private  consumption  and  inventories  continued  to 
support the output expansion, weak investment and 
exports were a drag on growth. 

The  near-term  outlook  for  the  manufacturing 
sector  suggests  some  weakening  ahead.  A 
comprehensive view of leading indicators suggests 
that  the  current  recovery  should  weaken  but 
continue  at  above  potential  rates.  Real  GDP  is 
expected  to  grow  by  1.3%  in  2018  before  easing 
down  to  1.1%  in  2019.  The  forecast  scenario  is 
based on a no-policy-change assumption and does 
not  incorporate  the  effects  of  legislated  VAT  and 
excise 
tax  hikes  envisaged  for  2019  as  a 
“safeguard clause” in the 2018 budget. 

Domestic  demand  is  expected  to  remain  the  main 
growth  driver  amid  a  more  challenging  external 
environment.  Investment  is  expected  to  pick-up, 
supported  by  favourable  financing  conditions  and 
tax incentives, although financial market volatility 
reflecting  global  and  domestic  uncertainty  is 
expected to delay some investment decisions in the 

-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.010111213141516171819Graph 2.11: Croatia -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
short term. In 2019, the phase-out of tax incentives 
and  gradually  rising  interest  rates  is  forecast  to 
dampen investment growth. The rise in household 
spending is set to continue in light of rising wages 
and  employment.  But  higher  oil  prices  are 
expected  to  weigh  on  disposable  incomes  and 
slightly  dampen  private  consumption.  Net  exports 
are  unlikely  to  make  a  positive  contribution  to 
growth  due  to  the  lagged  impact  of  the  euro’s 
appreciation  and  moderating  growth  in  some  of 
Italy’s main trading partners. 

to 

Downside  risks 
the  growth  outlook  have 
become  more  prominent  amid  heightened  global 
and  domestic  policy  uncertainty.  At  the  domestic 
level,  any  re-emerging  concerns  or  uncertainty 
about economic policies and the possible spillover 
of higher sovereign yields into corporate financing 
costs  could  worsen  funding  conditions  and  mute 
domestic demand. 

Summer 2018 (Interim) forecast 

2.13.  CYPRUS 

After  expanding  by  3.9%  in  2017,  a  nine-year 
high,  Cyprus’  economy  continued  its  cyclical 
upswing  in  early  2018,  posting  3.8%  (y-o-y) 
growth  in  the  first  quarter  of  2018.  Growth  was 
driven  by  solid  domestic  demand  and,  lately, 
exports.  Consumer 
to 
improve,  while  business  confidence  across  major 
sectors either increased or levelled off, suggesting 
continued momentum in the coming quarters.  

continued 

sentiment 

The  composition  of  growth  shifted  somewhat  in 
early  2018.  Investment,  after  breaking  an  historic 
high  in  the  last  quarter  of  2017,  fell  in  the  first 
quarter  of  this  year.  Goods  exports,  by  contrast, 
more  than  doubled  compared  to  the  previous 
quarter. Shipping sector activity was at the heart of 
these  pronounced  changes,  with  ship  acquisitions 
moderating,  while  ship  sale/deregistration  reached 
record high levels. Excluding shipping activity, the 
underlying trends remained broadly stable and this 
compositional shift is expected to be temporary.  

Exports  of  services  were  subdued  in  the  first 
quarter  of  the  year.  This  soft  patch  is  likely  to  be 
overcome  in  the  quarters  ahead  thanks  to  the 
marked increase in tourist arrivals already recorded 
in the  spring  months as  well  as the completion of 
new hotels for tourists. 

continues 

consumption 

Private 
expand, 
supported  by  rapidly  rising  employment  and 
gradually  increasing  wages.  Survey  data  reveal 
that  hiring  is  set  to  continue  strongly  in  the  near 
future, giving a further boost to disposable income. 

to 

index 

After  averaging  1.3%  in  2017,  consumer  price 
inflation is set to rise, mainly as a result of higher 
is 
energy  prices.  The  headline  HICP 
expected  to  increase  by  1.4%  this  year  and  by 
1.6% in 2019, largely due to the effect of higher oil 
prices, which will be further amplified by a weaker 
euro. A stronger price increase in 2018 is unlikely 
given  substantial  base  effects  related  to  services. 
For 2019, consumer prices are expected to grow in 
line  with  rising  commodity  prices  and  wages, 
especially  in  the  services  sector.  Core  inflation  is 
set to pick up gradually over the forecast period, in 
line with accelerating wage growth. 

Cyprus’  struggling  financial  sector,  which  has 
been a drag on the economy since the crisis years, 
is  consolidating.  Once  finalised,  the  sale  of  the 
second largest bank, Cyprus  Cooperative  Bank, is 
expected  to  reduce  uncertainties  surrounding  the 
macroeconomic outlook. Overall, real GDP growth 
is  expected  to  reach  3.6%  in  2018  and  3.3%  in 
2019, unchanged since the spring. 

Inflationary pressures remain weak. HICP inflation 
dropped  during  the  first  four  months  of  the  year 
and  turned  positive  only  in  May.  The  decrease  in 
prices  was  rather  broad-based,  reflecting  strong 
competition among retailers in several sectors and 
is 
subdued  wage  dynamics.  HICP 
expected to be positive for the year as a whole due 
to  increasing  services  and  energy  prices.  It  is 

inflation 

19 

-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.010111213141516171819Graph 2.12: Italy -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
Summer 2018 (Interim) forecast 

expected  to  pick  up  further  in  2019,  mainly  as  a 
result of higher oil prices and the gradual build-up 
of  domestic  price  pressures  amid  rapid  economic 
recovery. 

2.14.  LATVIA 

In  2017,  GDP  growth  in  Latvia  reached  4.5%, 
driven by solid growth in all components including 
double-digit  investment  growth  as  a  result  of  EU 
investment  funding  programmes.  GDP  growth 
accelerated during the first quarter of 2018, mostly 
due  to  continued  strong  growth  in  investment.  As 
this trend is unlikely to be sustained at such levels, 
GDP  growth  is  forecast  to  slow  down  in  the 
coming quarters. 

Overall,  GDP  growth  is  set  to  average  3.3%  in 
2018, led by private  consumption and investment, 
which  is  expected  to  continue  receiving  strong 
impetus  from  the  use  of  EU  investment  funds  but 
should slow down towards the end of the  year, as 
the fund flows near their peak. On the other hand, 
the  downsizing of the non-resident banking sector 
and  continued  contraction  in  transit  services  are 
expected to weigh on export growth.  

In  2019,  economic  growth  is  expected  to  remain 
above 3% supported in a balanced way by private 
consumption,  investment  and  exports.  As  the  use 
of  EU  investment  funding  peaks,  the  boost  to 
investment should wane, bringing its growth more 
in line with that of the economy generally. Export 
growth,  however,  is  expected  to  recover  as  the 
effects  of  the  decline  in  financial  services  exports 
fades.  

20 

Wages  are  expected  to  rise  rapidly  over  the 
forecast horizon,  with the falling  supply of labour 
and  the  moderate  increase  in  employment  also 
causing  unemployment  to  decrease  further.  Wage 
pressures,  however,  should  temper  somewhat  as 
the rate of investment growth normalises.  

Inflation  is  expected  to  slow  down  in  2018  and 
remain  flat  in  2019.  Although  energy  prices  are 
expected to pick up in 2018, their effects should be 
outweighed by lower food price increases. In 2019, 
reversed  dynamics  are  expected  as  energy  prices 
are set to increase more slowly while service prices 
are expected to pick up as a result of the high wage 
increases in recent years.  

Risks  to  the  forecast  are  tilted  to  the  downside  as 
the  structural  decline  in  Latvian  financial  and 
transport  services  exports  is  expected  to  continue 
and  any  worsening  in  the  external  environment 
could  weigh  on  national  income  and  domestic 
demand. 

2.15.  LITHUANIA 

In  2017,  real  GDP  grew  by  3.8%,  driven  by 
booming  exports  and  a  strong  pick  up  in  private 
investment,  although  the  usage  of  EU  funds 
remained sluggish. Growth  was also supported by 
strong  private  consumption.  Its  dynamics  were 
influenced  by  notable  wage  growth,  which  offset 
the  negative  effects  of  high 
inflation  and 
population decline. 

Good  economic  momentum  continued  in  2018 
with  a  growth  rate  of  0.9%  (q-o-q)  in  the  first 
quarter  based  on  the  strong  performance  of 
the  construction  sector.  Private 
industry  and 

-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.010.010111213141516171819Graph 2.13: Cyprus -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-8.0-6.0-4.0-2.00.02.04.06.08.010.012.014.010111213141516171819Graph 2.14: Latvia -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
consumption  continued  to  be  one  of  the  main 
growth  drivers,  while  the  contribution  of  net 
exports,  though  negative,  was  somewhat  better 
than expected. 

The  most  recent  economic  sentiment  indicators 
have  been  strong.  Positive  expectations  in  the 
service sector, high levels of consumer confidence 
and  rapidly  rising  wages  point 
to  a  stable 
expansion  of  private  consumption  in  the  coming 
quarters.  Investment  is  also  set  to  remain  an 
important growth driver. 

Over  the  forecast  horizon,  economic  growth  is 
expected  to  moderate  somewhat  due  to  slower 
growth  in  major  trading  partners.  Overall,  real 
GDP  is  forecast  to  grow  solidly  at  3.1%  in  2018 
and 2.6% in 2019.  

Summer 2018 (Interim) forecast 

a  strong  expansion  the  year  before,  which  was 
flattered  by  a  large-scale  sale  of  assets.  This  was 
only  partially  offset  by  the  strong  performance  of 
the investment funds sector. These figures need to 
be  analysed  with  caution,  given  the  frequent  and 
substantial  revisions  to  Luxembourg’s  national 
accounts data. 

Looking  forward,  the  reduced  activity  in  the 
banking  sector  and  the  increased  financial  market 
volatility early this year have somewhat weakened 
growth prospects for financial services and for the 
economy  as  a  whole.  However,  the  country’s 
economic prospects remain sound, underpinned by 
the  accommodative  monetary  policy  environment 
and the ongoing expansion in the euro area. Firmer 
trends 
private 
consumption are also supporting real GDP growth, 
which  is  expected  to  reach  3.5%  in  2018,  before 
slowing slightly to 3.3% in 2019. 

business 

services 

and 

in 

As the effects of excise duties hikes in 2017 fade, 
inflation is expected to slow, increasing disposable 
income and supporting private consumption. HICP 
inflation  is  forecast  to  fall  from  3.7%  in  2017  to 
2.7%  in  2018  and  to  2.2%  in  2019.  Meanwhile, 
rising  oil  prices  (especially  in  2018)  and  strong 
wage  growth,  which  has  a  particular  effect  on 
service  prices,  are  set  to  drive  inflation  over  the 
forecast horizon. 

2.16.  LUXEMBOURG 

Luxembourg’s  economic  growth  slowed  to  2.3% 
in 2017 from 3.1% in 2016. This slowdown, which 
was  unusual  among  euro  area  countries,  was 
driven  by  weaker  external  demand  and  an 
exceptionally  subdued  performance  in  financial 
services,  Luxembourg’s  main  economic  driver. 
Activity contracted in the banking sector following 

is  expected 

to 
Private  consumption  growth 
strengthen 
in  2018,  as  stronger  employment 
creation  pushes  up  disposable  income  growth. 
High job vacancy rates remain a source of concern 
about  constraints  in  the  supply  of  skilled  labour. 
Lingering  income  gains  from  recent  tax  reforms 
and  the  wage  indexation  projected  for  the  third 
quarter should offset the negative impact of higher 
oil prices.  

In  2019,  private  consumption  growth  is  projected 
to lose some momentum as employment growth is 
expected  to  slow  down  while  the  impact  of  past 
income gains fades. Meanwhile private investment 
should be boosted by the reduction in the corporate 
income tax. The main downside risk to the forecast 
concerns a worsening of the external environment, 
which  might  lead  to  a  correction  in  financial 

21 

-6.0-4.0-2.00.02.04.06.08.010111213141516171819Graph 2.15: Lithuania -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-4.0-3.0-2.0-1.00.01.02.03.04.05.06.07.010111213141516171819Graph 2.16: Luxembourg -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

market  valuations,  to  which  the  economy  is 
especially sensitive. 

HICP  inflation  bounced  up  to  2.1%  in  2017  from 
zero  in  2016,  mainly  as  a  result  of  higher  oil 
prices, which are expected to continue feeding into 
headline  inflation  in  2018.  However,  downside 
factors for inflation, such as subsidies in child and 
healthcare services introduced in November 2017, 
are expected to moderate overall inflation to 1.6% 
in 2018. As these effects dissipate, domestic price 
pressures,  including  from  past  wage  increases, 
should drive the headline inflation rate to 1.9% in 
2019. 

2.17.  HUNGARY 

GDP  growth  remained  steady  at  1.2%  (q-o-q)  in 
the  first  quarter  of  2018,  supported  mainly  by 
domestic demand. However, exports failed to keep 
pace  with  rising 
import  demand.  Sentiment 
indicators  have  remained  buoyant  up  to  June,  but 
recent  production  data  indicate  some  deceleration 
in  the  second  quarter.  The  level  of  industrial 
production has been flat since the beginning of the 
year, and construction output has decreased. 

Private  consumption  is  set  to  grow  robustly  in 
2018  thanks  to  rising  employment  and  dynamic 
real  wage  growth.  Investment  growth  remains 
capacity 
broad-based, 
utilisation,  rising  public  capital  expenditure  and 
the recovery of the real estate sector. The cyclical 
upswing of domestic demand is set to moderate in 
2019, leading to slower GDP growth. 

supported 

high 

by 

While  domestic  demand  remains  dynamic,  the 
external  environment  has  become  less  supportive. 
The soft patch of growth in main export markets is 
proving  persistent.  Consequently,  Hungarian 
export  growth  may  slow  down  in  2018,  despite 
major  new  manufacturing  capacities  starting 
production.  In  addition,  the  prominent  role  of  the 
automotive  industry  (which  accounts  for  over  5% 
of gross value added) makes the economy sensitive 
to global trade disputes, creating a new risk for the 
outlook. 

HICP  inflation  rose  to  2.9%  in  May  2018,  driven 
by  the  surge  in  oil  prices  and  the  depreciation  of 
the  forint.  The  weaker  exchange  rate  may  also 
raise  non-energy  prices  in  the  coming  quarters. 
The  tight  labour  market  and  administrative  wage 
hikes  are  maintaining  upward  pressure  on  wages, 

22 

which will gradually feed into core inflation. Thus, 
HICP  inflation  is  expected  to  remain  near  3% 
throughout  2019.  The  aggregate  effect  of  newly 
planned  indirect  tax  measures  on  inflation  is 
broadly neutral in 2019. 

2.18.  MALTA 

Real GDP rose by 6.4% in 2017, one of the highest 
growth rates within the EU. Growth was driven by 
net  exports,  which  reflected  sustained  export 
growth  combined  with  a  contraction  in  imports. 
Domestic demand was affected by a sharp decline 
in investment,  which is attributable to strong base 
effects  from  exceptional  investment  growth  in 
previous  years.  The  solid  performance  of  the 
internationally-oriented services sector contributed 
to  maintain  Malta’s  sizeable  current  account 
surplus. 

Growth  is  set  to  remain  robust  but  to  moderate 
over the forecast horizon. Domestic demand is set 
to become the main driver of growth in the second 
half  of  2018,  underpinned  by  an  expansion  in 
public  and  private  consumption.  Investment  is 
expected to recover strongly in 2019, supported by 
projects  in  the  health,  technology  and  telecoms 
sectors.  The  robust  growth  rate  of  residential 
investment  is  set  to  moderate  in  line  with  the 
expected slowdown in population growth. 

The  economic  momentum  is  expected  to  further 
support  employment  creation,  on  the  back  of 
record-low  unemployment  and  increasing  labour 
supply  (resulting  from  the  inflows  of  foreign 
workers  and  the  rising  participation  of  women  in 
the labour market). Overall, real GDP is forecast to 
increase  by  5.4%  in  2018  and  5.0%  in  2019. 

-6.0-4.0-2.00.02.04.06.08.010111213141516171819Graph 2.17: Hungary -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
Downside  risks  are  mainly  related  to  geopolitical 
uncertainties,  which could be particularly relevant 
for  Malta’s  small  and  open  economy,  and  the 
possibility  of  a  slower-than-expected  recovery  in 
investment. 

Regulated  prices  in  the  electricity  market  and 
moderate  wage  dynamics  have  helped  keep 
inflation  slightly  below  the  euro  area  average. 
Headline  annual  HICP  inflation  is  forecast  to 
gradually  pick  up  over  the  forecast  horizon  to 
reach  1.8%  in  2019,  driven  by  price  pressures  in 
the services component. 

2.19.  THE NETHERLANDS 

After  solid  annual  real  GDP  growth  of  2.9%  in 
2017, growth moderated slightly in the first quarter 
of  2018.  Quarterly  growth  was  mainly  driven  by 
private  consumption,  partly  attributable  to  higher 
energy  consumption,  and  investment.  Net  exports 
contributed  negatively  to  growth,  reflecting  both 
the transition to domestic demand based growth as 
the  cycle  matures  and  a  less  dynamic  external 
environment. 

to  point 

Domestic  demand is projected to remain the  main 
driver  of  sustained  growth  rates.  Although  they 
peaked  in  the  first  quarter  of  2018,  confidence 
indicators  continue 
to  expansion. 
Employment growth has been solid so far this year 
but  is  expected  to  moderate  gradually  as  labour 
market 
supply 
constraints  have  increasingly  been  reflected  in 
recent  wage  agreements.  These  developments  are 
set  to  increase  disposable  incomes  and  thereby 
support  private  consumption  growth.  High 
capacity utilisation rates and business expectations 

tighten.  Labour 

conditions 

Summer 2018 (Interim) forecast 

the 

is  expected 

on  new  orders  should  provide  a  boost  to  robust 
investment  growth.  Furthermore, 
fiscal 
stimulus  ensuing  from  the  2018-2021  government 
agreement 
raise  government 
consumption growth in 2018 and to a lesser extent 
in  2019.  Net  exports  are  expected  to  contribute 
negatively  to  growth  in  2018,  although  monthly 
data  on  goods  exports  show  some  recovery  after 
the  weak  first  quarter.  Overall  GDP  growth  is 
expected to reach 2.8% in 2018 and 2.5% in 2019. 

to 

HICP  inflation  averaged  1.3%  in  2017  and  is 
expected to rise slightly to 1.5% in 2018, as higher 
oil  prices  pass 
into  energy  prices. 
Accelerating  wage  growth  is  set  to  boost  services 
inflation.  In  2019,  HICP  inflation  is  forecast  to 
increase  to  2.3%,  as  the  increase  in  the  reduced 
VAT tariff from 6% to 9% takes effect. 

through 

2.20.  AUSTRIA 

to  a  continuation  of 

After  a  strong  second  half  of  2017,  Austria 
experienced  solid  GDP  growth  in  the  first  quarter 
of  2018,  pointing 
the 
economic  expansion.  Growth  has  been  driven  by 
private  consumption  and  investment,  as  well  as  a 
positive  contribution  from  net  exports.  Economic 
sentiment  indicators  have  remained  well  above 
long-term  averages  so  far  this  year,  although  they 
have  declined  slightly  in  recent  months.  Overall, 
GDP growth is expected to remain high at 2.8% in 
2018 and to decrease somewhat to 2.1% in 2019. 

Investment  growth  is  set  to  stay  robust  over  the 
forecast horizon, but to moderate from high levels. 
It is expected to be supported by expansion needs 
in  light  of  high  capacity  utilisation  as  well  as  by 
full  construction  order  books  resulting  from 

23 

-10.0-5.00.05.010.015.010111213141516171819Graph 2.18: Malta -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-6.0-4.0-2.00.02.04.06.08.010111213141516171819Graph 2.19: The Netherlands -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

economic  and  population  growth.  Given 
the 
positive  developments  on  the  labour  market  and 
to 
rising  wages,  private  consumption 
continue  to  contribute  positively  to  growth.  It  is 
expected  to  grow  more  strongly  in  2018  and  to 
moderate in 2019.  

is  set 

In 2017, GDP growth  was supported by a notable 
uptake  in  external  demand.  In  2018  and  2019, 
Austria’s  foreign  trade  is  set  to  be  less  dynamic, 
but  should  continue  to  contribute  positively  to 
economic growth. 

Prices  increased  considerably  in  2017,  raising 
headline  and  core  inflation  both  to  2.2%,  which 
was mainly due to the pick-up of prices in services, 
as  well as rents. In 2018, the assumed increase in 
oil  prices  should  keep  headline  inflation  at  2.2%, 
before it slightly decreases to 1.9% in 2019, while 
core inflation is set to stabilise at 2.1%. 

2.21.  POLAND 

Growth strengthened in the first quarter of 2018 to 
1.6%  (q-o-q),  supported  mainly  by  strong  private 
consumption 
in 
inventories.  Despite  increasing  public  investment 
expenditure, investment growth remained modest.  

sizeable  build-up 

and 

a 

Economic sentiment remained at elevated levels up 
to June both among households and in the business 
sector,  which  suggests  that  solid  growth  should 
continue. Overall, real GDP growth is expected to 
reach  4.6%  in  2018  before  slowing  to  3.7%  in 
2019.  Fast  wage  increases  and  high  consumer 
confidence  levels  are  expected  to  support  private 
consumption,  though  its  growth  is  projected  to 
gradually  moderate  as  inflation  picks  up.  Public 

24 

investment  is  expected  to  rise  sharply  in  the 
coming  quarters  as  projects  financed  with  EU 
funding make progress. High capacity utilisation is 
projected  to  support  a  more  gradual  increase  in 
private 
equipment 
investment. 

investment, 

especially 

Downside  risks  are  related  to  the  outlook  for 
German  exports,  given  the  strong  role  of  Polish 
producers in associated supply chains. 

Core 
inflation  and  especially  services  prices 
surprised on the downside in  the  first  few  months 
of  2018  due  to  sector-specific  factors.  This  partly 
offset  the  effects  of  a  faster  rise  in  energy  prices. 
Headline  inflation  is  expected  to  average  1.3%  in 
2018 before rising to 2.6% in 2019, driven by fast 
wage growth, eventually leading to higher services 
prices. 

2.22.  PORTUGAL 

Portugal’s GDP growth slowed to 2.1% (y-o-y) in 
2018-Q1, mainly due to weaker net exports. Part of 
the  moderation  is  explained  by  temporary  factors, 
such  as  bad  weather  conditions  affecting 
construction activities and port services. Following 
a soft patch at the beginning of the year, economic 
sentiment improved in May and June pointing to a 
more  favourable  performance 
the  second 
quarter.  This  is  also  confirmed  by  the  latest 
available hard data. 

in 

labour  market  conditions  but 

Private  consumption  continues  to  benefit  from 
improving 
is 
nevertheless  projected  to  decelerate  somewhat 
over  the  second  half  of  2018  as  the  pace  of  job 
creation slows and, to a lesser extent, as a result of 

-1.0-0.50.00.51.01.52.02.53.03.510111213141516171819Graph 2.20: Austria -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-2.0-1.00.01.02.03.04.05.06.010111213141516171819Graph 2.21: Poland -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

of  the  slowdown  was  a  contraction  in  private 
consumption as inflation weighed more heavily on 
real disposable income. Export growth, in contrast, 
remained  very  robust  in  the  first  quarter  of  2018 
and outpaced the growth of imports. 

Looking  ahead,  real  GDP  growth  is  forecast  to 
decelerate to 4.1% in 2018 and 3.8% in 2019. The 
composition of growth is expected to become more 
balanced  as  private  consumption  growth  tempers 
and investment strengthens on the back of a pick-
up  in  the  implementation  of  projects  financed  by 
EU funds. 

the 

Tight  labour  market  conditions  are  expected  to 
forecast  horizon,  with 
continue  over 
unemployment remaining close to its current very 
low  level.  Nominal  wage  growth  is  expected  to 
continue  in  2018,  albeit  at  a  slower  pace,  on  the 
back  of  further  increases  in  public  wages  and  an 
additional 9% hike in the net minimum wage as of 
January  2018.  Real  wage  growth,  however,  is 
expected to moderate significantly in 2018, due to 
the higher inflation. 

the  impact  of  higher  oil  prices  on  real  disposable 
incomes.  Equipment  investment  remains  strong 
and  the  outlook  is  also  favourable,  reflecting  the 
improved  financial  health  of  the  corporate  sector, 
favourable lending conditions and a  steady rise  in 
capacity  utilisation.  In  addition,  construction 
investment is expected to rebound after the heavy 
rainfalls in March, as suggested by improved data 
on cement sales in 2018-Q2. 

Both exports and imports are projected to continue 
expanding  at  high  rates,  with  a  slightly  negative 
overall  contribution  to  growth  due  to  a  less 
favourable  external  environment.  Overall,  real 
GDP  growth  is  expected  to  rise  by  2.2%  in  2018 
and 2.0% in 2019.  

Following  a  significant  slowdown  early  in  the 
year,  inflation  began  to  pick  up  in  May,  driven 
mainly by the surge in oil prices. Inflation (HICP) 
is therefore expected to average 1.4% in 2018 and 
1.6% in 2019. Wage growth has been subdued but 
is projected to gradually pick up over the forecast 
horizon, pushing service prices above the headline 
inflation  rate.  House  prices,  meanwhile,  rose  by 
12.2%  (y-o-y)  in  2018-Q1,  driven  by  tourism-
related  activities  and  foreign  capital  inflows.  The 
ongoing  recovery  in  residential  construction  is 
expected  to  gradually  rein  in  house  prices  but  the 
gap  relative  to  the  headline  inflation  rate  is  set  to 
remain substantial over the forecast horizon. 

2.23.  ROMANIA 

The Romanian economic boom has started to wind 
down. After reaching a post-crisis peak of 6.9% in 
2017,  real  GDP  growth  decelerated  to  4.0% 
(y-o-y) in the first quarter of 2018. The main driver 

After  two  consecutive  years  of  falling  consumer 
prices,  inflation  turned  positive  in  2017,  despite 
VAT  rate  cuts  and  lower  excise  duties  on  fuel. 
Headline  inflation  started  to  accelerate  in  the 
second half of the year mainly on account of rising 
food  and  energy  prices  and  further  picked  up  in 
early  2018  as  the  effect  of  the  January  2017  tax 
cuts faded away. Annual headline inflation stood at 
4.6% in May this year. The reversal of the January 
excise  duties  cut  in  October  2017  will  exert  an 
additional  pressure  on  inflation  in  the  first  three 
quarters of 2018. Thus, inflation is forecast to rise 
to 4.4% in 2018 and 3.4% in 2019. In response to 
the rising inflation, the National Bank of Romania 

25 

-10.0-8.0-6.0-4.0-2.00.02.04.06.010111213141516171819Graph 2.22: Portugal -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-4.0-2.00.02.04.06.08.010.010111213141516171819Graph 2.23: Romania -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

has  started  to  tighten  its  highly  accommodative 
monetary policy. In 2018 so far the key  monetary 
policy rate was raised by 0.75 pps. to 2.5%. These 
are the first rate hikes since 2008. 

2.24.  SLOVENIA 

In  2017,  real  GDP  grew  by  5.0%  in  Slovenia, 
reaching  a  10-year  high,  driven  mainly  by 
investment.  In 
domestic  demand,  particularly 
2018-Q1, the economy grew by 0.7%, compared to 
the  previous  quarter  and  5.0%  compared  with  the 
same  quarter  in  2017.  Export  growth  diminished 
due  to  lower  foreign  demand,  while  imports, 
consumption and investment continued to expand. 
Economic sentiment fell somewhat in the first half 
of 2018 compared to the end of 2017 but remained 
at a very high level. 

as  domestic  demand 

Real GDP growth is forecast to reach 4.4% in 2018 
and  3.5%  in  2019,  slightly  lower  than  4.7%  and 
3.6%  expected  in  the  spring  forecast.  While 
external  demand  has  grown  less  than  previously 
expected,  Slovenia’s  exports  are  likely  to  benefit 
from a good competitive position. Nevertheless net 
exports’  growth  contribution  is  likely  to  turn 
strengthens, 
negative 
supported  by  growing  employment,  wages  and 
favourable 
conditions.  Business 
investment  growth  is  forecast  to  continue  at  a 
rather  high  rate  on  the  back  of  high  capacity 
utilisation  and  a  tightening  labour  market  amid 
stronger balance sheets and improved profitability. 
In  the  public  sector,  a  more  intensive  use  of  EU 
funds  for  investment  projects  is  forecast  for  2018 
and 2019. 

financing 

Downside risks to the growth outlook are linked to 
developments  in  Slovenia’s  key  export  markets 
and  the  possibility  that  labour  supply  shortages 
could  start  to  limit  growth.  On  the  upside,  the 
positive impact of improving access to credit could 
be larger than expected. 

Overall,  price  pressures  are  expected  to  increase. 
HICP  inflation  was  1.5%  in  the  first  quarter  of 
2018  and  rose 
in  April  and  May.  Overall, 
consumer  prices  are  projected  to  rise  by  2.1%  in 
2018  and  2.2%  in  2019,  slightly  higher  than  the 
1.9%  and  2.0%  expected  in  the  spring  forecast, 
driven by energy prices and wages growth. 

2.25.  SLOVAKIA  

After  expanding  by  3.4%  in  2017,  the  Slovak 
economy  is  expected  to  grow  by  around  4%  in 
2018  and  2019,  with  private  consumption  and 
investment likely to be the main drivers of growth. 
Investment  growth  is  anticipated  to  peak  in  2018, 
driven  by  booming  investment  in  the  automotive 
industry and some large-scale public infrastructure 
projects.  Investment  surged  by  6.2%  (q-o-q)  in 
2018-Q1,  pointing  to  a  robust  annual  increase  for 
the  year  as  a  whole.  Investment  activity  will 
probably remain solid throughout 2019, supported 
by  a  more  buoyant  drawdown  of  EU  investment 
funds.  Net 
to  contribute 
positively to growth as exports benefit from the car 
industry’s  expanded  production  capacity  but  there 
is heightened uncertainty surrounding global trade 
developments. 

is  expected 

trade 

their 

to  see 

in  private  consumption  given 

real 
Households  are  expected 
disposable 
incomes  rise  as  improving  labour 
market conditions, including broad-based and swift 
wage growth, should outweigh the impact of rising 
inflation.  This  is  expected  to  support  continued 
growth 
that 
consumer  confidence  remains  upbeat.  Further 
labour  market tightening  in the  context of already 
record-high labour shortages is set to keep nominal 
wage  growth  high  throughout  2018  and  2019.  At 
the  same  time,  a  shrinking  supply  of  skilled 
workers,  coupled  with  rising  demand  for  labour, 
represents  a  potential  bottleneck  for  Slovakia’s 
booming economy.  

Headline inflation is projected to increase to 2.6% 
in  2018,  reflecting  solid  wage  growth  and  robust 
household  spending.  Prices  of  services  and  food 
are expected to be the main contributors to overall 

26 

-8.0-6.0-4.0-2.00.02.04.06.010111213141516171819Graph 2.24: Slovenia -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
growth  in  consumer  prices  over  the  forecast 
horizon.  Core  inflation  is  expected  to  pick  up 
significantly  this  year.  Both  headline  and  core 
inflation  are  expected  to  ease  somewhat  in  2019, 
while remaining above 2%. 

Summer 2018 (Interim) forecast 

Risks  to  the  outlook  are  broadly  balanced.  A 
higher-than-forecast  decrease  in  demand  from 
Finland’s  main  EU  trading  partners  could  harm 
exports  growth  and  investment.  On  the  flip  side, 
further  productivity  gains  could  trigger  higher 
investment  spending.  Higher  oil  prices  could  also 
boost Russian demand for Finnish goods. 

Price  pressures  are  expected  to  remain  subdued. 
Inflation  (HICP)  in  the  first  half  of  2018  was 
among the lowest in the EU. Some acceleration is 
forecast  on  the  back  of  the  rapid  increase  in  oil 
prices,  although  core  inflation  is  likely  to  remain 
low  at  0.8%,  with  only  a  gradual  acceleration  in 
2019. 

2.26.  FINLAND 

After  reaching  a  six-year  high  of  2.6%  in  2017, 
preliminary  data  show  that  real  GDP  growth  in 
Finland  hit  3.1%  (y-o-y)  in  the  first  quarter  of 
2018,  led  by  private  consumption  and  machinery 
investment. Investment growth surprised positively 
with  a  7.9%  increase  (y-o-y).  Most  indicators 
suggest  that  the  economy’s  growth  momentum 
should continue into the second quarter of 2018. 

favourable 

financing  conditions 

The economic outlook remains favourable. Higher 
employment,  higher  disposable  income  and  solid 
consumer  confidence  are  expected 
to  drive 
household  consumption.  High  capacity  utilisation 
and 
should 
support investment. Investment growth is projected 
to  remain  strong,  despite  some  deceleration  in 
construction  activity.  Recent  productivity  gains 
have 
is 
underpinning  export  growth,  while  import  growth 
is  expected  to  strengthen  further  on  the  back  of 
rising private consumption. Supported by moderate 
wage  growth,  the  employment  rate  is  expected  to 
increase  further  but  significant  slack  is  likely  to 
remain in the labour market.  

competitiveness,  which 

improved 

Overall, real GDP growth this  year  is expected to 
reach 2.8%. In 2019, however, growth is expected 
to  slow  to  2.2%,  as  Finland’s  shrinking  working-
age  population  and  persistently  high  structural 
unemployment weigh on growth.  

2.27.  SWEDEN 

Economic  growth  in  Sweden  eased  somewhat  in 
2017,  with  real  GDP  growth  of  2.3%,  mainly 
driven by solid domestic demand. The estimate for 
the  first  quarter  of  2018  suggests  that  economic 
activity  remained  solid  (0.7%  q-o-q),  based  on 
buoyant construction investment and strong private 
consumption.  However,  the  contribution  from  net 
exports turned negative, reflecting weaker demand 
from Sweden’s main trading partners. 

Real  GDP  growth  is  expected  to  remain  firm  at 
2.4% in 2018, before moderating to 1.9% in 2019 
when  lower  housing  investment  is  expected  to 
flatten  domestic  demand.  Following  two  decades 
of  strong  growth,  house  prices  declined 
in 
2017-Q4  and  have  broadly  stabilised  since.  This 
development in the construction sector is reflected 
in overall economic sentiment,  which has been on 
a  downward  trend  since  November.  Nevertheless, 
a strong labour  market has continued to support a 

27 

-6.0-4.0-2.00.02.04.06.08.010111213141516171819Graph 2.25: Slovakia -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-2.0-1.00.01.02.03.04.05.010111213141516171819Graph 2.26: Finland -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

further  increase  in  household  incomes,  which  is 
likely to feed private consumption growth in 2018 
and 2019.  

Turning  to  the  external  sector,  in  spite  of  the 
Swedish  krona’s  depreciation,  exports  of  goods 
and services surprised on the downside in the first 
quarter  of  2018,  contracting  by  0.2%  (q-o-q). 
Trade-related  uncertainty  is  expected  to  weigh  on 
external  demand  and  investment  decisions  going 
forward.  

Risks  are  tilted  to  the  downside.  As  a  small  open 
economy,  Sweden  remains  vulnerable  to  external 
shocks.  While  the  recent  decline  in  house  prices 
seems  to  have  come  to  a  halt,  a  renewed  decline 
could  reduce  residential  construction  activity  with 
repercussions  on  consumer  confidence,  household 
consumption, and ultimately growth.  

Headline  inflation  stood  at  2.0%  in  May,  the 
Riksbank’s  target  rate  for  price  increases,  fuelled 
by  high  energy  and  food  prices.  However,  core 
inflation  was  only  at  1.1%,  suggesting  still 
subdued  price  pressures.  HICP  is  projected  to  be 
1.9% in 2018 as in 2017 and to edge down to 1.7% 
in  2019.  The  weak  Swedish  krona  is  set  to  exert 
upward  pressures  on  import  prices  but  despite  a 
tight domestic labour market wage growth remains 
weak.  

disruption  in  March.  High  frequency  indicators 
suggest that the output lost in 2018-Q1 will not be 
recovered  in  2018-Q2,  which  is  consistent  with 
surveys  indicating  that  firms  in  the  construction 
and  manufacturing  sectors  are  facing  capacity 
constraints and are therefore unable to make up for 
lost output.  

an 

and 

confidence 

For 2018 as a whole, private  consumption growth 
is  expected  to  remain  subdued  despite  support 
from  generally  easing  inflation,  reflecting  low 
consumer 
anticipated 
stabilisation in the household saving rate. Business 
investment  growth  is  projected  to  remain  weak 
while  uncertainty  over  the  UK’s  future  trading 
relationship  with  the  EU  remains.  Net  trade  is 
expected  to  moderate  in  2018,  in  line  with  the 
unwinding  of  the  boost  from  sterling’s  2016 
depreciation  and  moderating  export  market 
growth.  Reflecting  this  outlook,  modest  GDP 
growth  of  1.3%  in  2018  is  forecast.  Risks  to  the 
the  downside. 
2018 
tilted 
forecast  are 
Domestically,  downside 
the 
relate 
possibility  that  the  household  saving  rate  rises 
faster 
lower 
consumption  growth.  While  on  the  external  side, 
as  an  open  economy,  the  UK  is  particularly 
exposed  to  an  escalation  in  trade  protectionist 
measures that could further inhibit export growth.  

to 
risks 

anticipated 

leading 

than 

to 

to 

2.28.  THE UNITED KINGDOM 

Economic  growth  in  the  UK  slowed  significantly 
at the start of 2018: GDP growth was 0.2% (q-o-q) 
in  2018-Q1  down  from  0.4%  in  2017-Q4.  This 
slowdown  was  in  part  due  to  severe  weather  

Given  the  ongoing  negotiation  over  the  terms  of 
the UK’s withdrawal from the EU, projections for 
2019  continue  to  be  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.  Under  this  assumption,  GDP  growth  is  

28 

-2.0-1.00.01.02.03.04.05.06.07.010111213141516171819Graph 2.27: Sweden -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast-1.5-1.0-0.50.00.51.01.52.02.53.03.510111213141516171819Graph 2.28: The United Kingdom -Real GDP growth and contributionsReal GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
 
 
Summer 2018 (Interim) forecast 

projected  to  remain  weak  at  1.2%  in  2019.  The 
boost  from  lower  consumer  price  inflation  on 
private  consumption  is  expected  to  be  offset  by  a 
the  household  saving  rate.  Business 
rise 
in 
investment 
remain  subdued 
to 
following  a  period  of  prolonged  uncertainty. 
Export  growth  is  expected  to  remain  modest, 
broadly  in  line  with  growth  in  export  markets. 
However,  as  the  purely  technical  assumption 
implies  a  relatively  benign  scenario,  the  risks  to 

is  projected 

 the  2019  baseline 
predominantly to the downside.  

forecast  are 

large  and 

Consumer  price  inflation  is  expected  to  remain 
elevated  in  2018  at  2.6%  but  to  slow  over  the 
course of the year. The impact of the recent rise in 
oil prices should partly offset the unwinding of the 
pass  through  sterling’s  earlier  depreciation  on 
consumer  prices.  Inflation  is  projected  to  ease  to 
2.0% in 2019.  

29 

 
 
Summer 2018 (Interim) forecast 

STATISTICAL ANNEX  

30 

Table 1:3.7.20185-year  1999-032004-082009-13201420152016201720182019201820192.12.50.51.31.41.41.7 1.71.61.81.71.22.00.61.91.71.92.2 1.91.92.32.15.85.50.02.91.72.14.9 3.52.73.72.87.03.80.38.325.65.17.8 5.64.05.74.14.22.8-5.90.7-0.3-0.21.4 1.92.31.92.34.03.2-1.81.43.43.33.1 2.82.42.92.42.31.90.41.01.11.22.2 1.71.72.01.81.51.0-1.60.11.00.91.5 1.31.11.51.24.04.3-1.9-1.42.03.43.9 3.63.33.63.36.07.3-1.41.93.02.24.5 3.33.23.33.3Lithuania5.27.0-0.33.52.02.33.8 3.12.63.12.74.93.81.25.82.93.12.3 3.53.33.73.53.32.71.98.19.65.26.4 5.45.05.85.12.42.7-0.41.42.02.22.9 2.82.53.02.62.22.70.30.81.11.53.0 2.82.12.82.21.91.4-1.60.91.81.62.7 2.22.02.32.03.84.8-2.03.02.33.15.0 4.43.54.73.62.87.41.12.83.93.33.4 3.94.24.04.23.33.3-1.1-0.60.12.12.6 2.82.22.52.32.12.1-0.41.32.11.82.4 2.12.02.32.02.56.80.11.33.63.93.6 3.83.73.83.72.85.3-0.42.75.32.54.3 3.02.93.43.11.71.9-0.11.61.62.02.3 1.61.81.81.93.44.0-2.4-0.12.43.52.9 2.62.52.82.73.92.9-0.84.23.42.24.0 4.03.24.03.23.25.22.93.33.83.04.6 4.63.74.33.73.67.1-0.43.14.04.86.9 4.13.84.53.93.02.90.82.64.53.22.3 2.41.92.62.0EU272.22.4-0.31.52.32.02.6 2.32.12.52.23.12.00.52.92.31.81.7 1.31.21.51.22.32.3-0.11.72.31.92.4 2.12.02.32.0EU28Czech RepublicSlovakiaCyprusforecastUnited KingdomBulgariaItalyPolandSloveniaRomaniaGreeceEuro areaDenmarkNetherlandsSpring 2018MaltaIrelandSummer 2018SwedenFinlandLatviaGross domestic product, volume (percentage change on preceding year, 1999-2019)FranceHungaryPortugalLuxembourgEstoniaBelgiumforecastaveragesCroatiaAustriaSpainGermanyTable .2:Table 2:3.7.20182017/12017/22017/32017/42018/12018/22018/32018/42019/12019/22019/32019/40.70.50.20.50.30.40.50.50.40.30.30.30.90.60.70.60.30.30.50.50.50.50.50.41.11.60.12.1-0.11.01.10.80.60.50.50.5::::::::::::::::::::::::0.80.90.70.70.70.70.70.60.60.50.50.50.80.70.70.70.20.30.40.40.40.50.50.50.50.40.30.40.30.20.30.30.20.30.20.2::::::::::::1.41.41.50.41.50.20.30.40.91.01.01.0Lithuania1.10.70.51.40.90.40.60.70.70.70.70.7::::::::::::::::::::::::0.51.00.60.90.60.60.70.70.60.60.50.51.10.80.90.90.80.40.50.50.50.50.50.50.70.30.60.70.40.60.50.60.50.50.40.51.61.31.11.90.70.90.90.90.80.80.80.80.81.00.80.90.91.21.21.21.21.00.91.00.90.60.30.91.20.50.30.30.70.70.70.70.70.70.70.70.40.40.50.50.40.50.50.50.91.00.90.70.91.01.01.10.80.80.80.81.32.30.50.70.50.70.70.70.70.80.70.72.4-1.1-0.80.90.40.70.70.70.30.30.30.30.90.70.60.00.21.01.10.80.60.50.50.51.41.11.11.31.20.60.70.80.80.80.80.81.10.91.41.01.60.90.80.90.90.90.90.92.41.62.20.30.01.71.41.20.80.70.60.50.41.10.60.70.70.50.40.40.40.40.30.3EU270.70.80.70.70.40.50.50.50.50.50.50.50.40.20.40.40.20.30.40.40.30.30.30.20.70.70.70.70.40.40.50.50.40.50.50.4BelgiumGreeceDenmarkFinlandLatviaSwedenCroatiaAustriaSpainNetherlandsProfiles (qoq) of quarterly GDP, volume (percentage change from previous quarter, 2017-19)Euro areaGermanyHungaryPortugalFranceEstoniaBulgariaLuxembourgItalySloveniaMaltaIrelandCzech RepublicCyprusSlovakiaUnited KingdomPolandEU28Romania 
 
 
 
 
Summer 2018 (Interim) forecast 

31 

Table .3:Table 3:5-year  1999-032004-082009-13201420152016201720182019201820191.92.61.90.50.61.82.2 1.91.61.61.61.32.11.50.80.10.41.7 1.71.81.61.83.55.83.10.50.10.83.7 2.92.72.92.54.12.60.10.30.0-0.20.3 1.01.30.81.13.23.41.9-1.4-1.10.01.1 0.71.30.51.23.03.41.8-0.2-0.6-0.32.0 1.81.61.41.41.72.21.50.60.10.31.2 1.91.51.71.42.42.42.00.20.1-0.11.3 1.41.61.21.42.92.51.9-0.3-1.5-1.20.7 0.81.40.71.22.49.01.70.70.20.12.9 2.62.62.72.6Lithuania0.74.92.80.2-0.70.73.7 2.72.22.72.32.43.32.20.70.10.02.1 1.61.91.51.72.52.62.10.81.20.91.3 1.51.81.61.83.11.72.00.30.20.11.3 1.52.31.62.21.62.22.11.50.81.02.2 2.21.92.11.93.32.61.5-0.20.50.61.6 1.41.61.21.67.43.61.90.4-0.8-0.21.6 2.12.21.92.08.34.12.2-0.1-0.3-0.51.4 2.62.22.42.12.01.52.41.2-0.20.40.8 1.31.71.41.72.02.41.70.40.00.21.5 1.71.71.51.65.77.82.3-1.6-1.1-1.31.2 2.01.81.81.82.33.11.80.40.30.62.4 2.12.02.11.82.32.01.80.40.20.01.1 0.91.50.81.43.53.42.20.2-0.3-0.61.3 1.61.81.41.57.85.74.00.00.10.42.4 2.73.22.33.05.02.83.00.1-0.7-0.21.6 1.32.61.32.532.78.14.81.4-0.4-1.11.1 4.43.44.23.41.81.71.30.20.71.11.9 1.91.71.91.73.12.71.90.40.00.21.6 1.81.81.61.71.22.33.11.50.00.72.7 2.62.02.51.92.72.62.10.50.00.31.7 1.91.81.71.8EU28Czech RepublicSlovakiaCyprusforecastHungaryPortugalBelgiumforecastaveragesCroatiaAustriaSpainGermanyRomaniaDenmark3.7.2018LuxembourgEstoniaUnited KingdomBulgariaItalyPolandSloveniaSpring 2018Harmonised index of consumer prices (percentage change on preceding year, 1999-2019)MaltaIrelandSummer 2018EU27Euro areaFranceNetherlandsGreeceSwedenFinlandLatviaTable .4:Table 4:3.7.20182017/12017/22017/32017/42018/12018/22018/32018/42019/12019/22019/32019/43.02.01.92.01.62.12.31.82.01.61.51.41.91.61.71.61.31.82.01.82.11.71.71.73.13.44.04.13.23.12.72.72.82.62.62.60.40.00.10.50.50.81.41.21.41.31.31.41.51.30.80.80.30.81.00.60.91.21.41.62.72.11.81.61.11.82.31.91.81.61.61.51.51.00.91.21.52.22.01.81.41.41.51.61.31.61.31.10.91.01.61.91.81.61.51.51.21.30.20.1-0.80.81.61.51.51.31.41.53.13.02.92.52.02.43.02.82.72.62.52.4Lithuania3.03.44.54.13.12.52.62.62.62.32.01.92.62.02.01.81.21.91.91.81.91.91.92.01.31.11.21.41.31.71.71.71.61.81.81.81.31.01.51.41.31.51.61.82.32.32.42.32.22.22.22.42.02.22.32.22.01.81.92.01.41.71.31.80.91.31.91.81.71.61.61.62.01.41.31.51.52.12.42.32.32.22.22.21.01.01.62.02.42.92.72.52.12.12.22.21.10.90.70.60.81.01.61.72.11.81.61.41.81.51.41.41.31.71.91.81.81.61.61.60.81.40.91.71.62.12.42.02.01.71.71.82.52.32.42.51.72.12.42.42.32.01.91.80.80.71.51.20.50.81.41.01.51.41.51.61.11.11.41.51.12.42.31.91.71.61.81.92.62.12.52.32.02.73.23.03.33.33.13.21.71.51.51.81.01.21.61.42.12.62.72.80.40.61.02.43.74.74.94.23.63.63.33.31.61.82.21.81.71.92.12.01.91.81.71.5EU271.71.51.51.51.31.72.01.81.91.71.71.72.22.82.83.02.72.52.82.52.22.01.91.81.81.71.71.71.51.92.12.01.91.81.71.7BelgiumGreeceDenmarkFinlandLatviaSwedenCroatiaAustriaSpainNetherlandsHarmonised index of consumer prices (percentage change on preceding year, 2017-19)Euro areaGermanyHungaryPortugalFranceEstoniaBulgariaLuxembourgItalySloveniaMaltaIrelandCzech RepublicCyprusSlovakiaUnited KingdomPolandEU28Romania 
 
 
 
Summer 2018 (Interim) forecast 

32 

(Continued on the next page) 

Box .1: Some technical elements behind the forecastThe European Commission presents its first summer issue of what will be twice-yearly interim forecasts, resuming its annual schedule of two-fully fledged forecasts and two much shorter interim forecasts as done until the height of the sovereign debt crisis. The interim forecasts provide an update of GDP and inflation developments for all EU Member States. This interim forecast updates the outlook of the spring 2018 economic forecast of 3 May 2018. Given the ongoing negotiations on the terms of the UK withdrawal from the EU, projections for 2019 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 outcome of the talks underway in the context of the Article 50 process. The cut-off date for taking new information into account in this European Economic Forecast was 3 July 2018.  ESA 2010 The source for all tables is the European Commission, unless otherwise stated. Historical data for the Member States are based on the European System of Accounting (ESA 2010). 2018 and 2019 are forecast years.  External assumptions This forecast is based on a set of external assumptions, reflecting market expectations at the time of the forecast. To shield the assumptions from possible volatility during any given trading day, averages from a 10-day reference period (between 15 and 28 June) were used for exchange and interest rates, and for oil prices.  The technical assumption regarding exchange rates was standardised using fixed nominal exchange rates for all currencies. This technical assumption leads to an implied average USD/EUR rate of 1.19 in 2018 and 1.16 in 2019. The average JPY/EUR is 129.71 in 2018 and 127.85 in 2019. Interest-rate assumptions are market-based. Short-term interest rates for the euro area are derived from futures contracts. Long-term interest rates for the euro area, as well as short- and long-term interest rates for other Member States are calculated using implicit forward swap rates, corrected for the current spread between the interest rate and swap rate. In cases where no market instrument is available, the fixed spread vis-à-vis the euro area interest rate is taken for both short- and long-term rates. As a result, short-term interest rates are assumed to be -0.3% in 2018 and  -0.2% in 2019 in the euro area. Long-term euro area interest rates are assumed to be 0.5% in 2018 and 0.6% in 2019. Commodity price assumptions are also based on market conditions. According to futures markets, prices for Brent oil are projected to be on average 72.8 USD/bbl in 2018, and 71.8 USD/bbl in 2019. This would correspond to an oil price of 61.4 EUR/bbl in 2018, and 61.8 EUR/bbl in 2019. Trade policies This Interim Summer Forecast is published against a background of rising trade tensions. The forecast pencils in only the measures that have been implemented until the cut-off date:  In January 2018, the US implemented safeguard tariffs on solar panels and washing machines from all countries (20 to 30 percent tariffs on imports worth $10.3 billion, combined).   On 23 March, US duties of 25% and 10% respectively on imports of steel and aluminium went into effect. One of the nations affected was China, which responded by imposing tariffs (mainly on aluminium waste and scrap as well as food), on imports worth about $2.5 billion, while several countries gained temporary or permanent or exemptions (Argentina, Australia, Brazil and South Korea, which all promised to adhere to voluntary export limits on these metals).  On 1 June, the exemptions granted to the EU (1), Canada and Mexico ended. The US measures are set to affect EU exports worth €6.4 billion in 2017, phased in 2 steps.   On 20 June, the European Commission exercised (2) its rights under WTO rules and                                                            (1) European Commission (2018). ‘European Commission reacts to the US restrictions on steel and aluminium affecting the EU’. European Commission Press Release 4006. June. (2) European Commission (2018). ‘EU adopts rebalancing measures in reaction to US steel and aluminium tariffs’. European Commission Press Release 4220. June.  
 
 
 
 
 
 
Summer 2018 (Interim) forecast 

Box (continued) 

Acknowledgements 

This  report  was  prepared  in  the  Directorate-General  for  Economic  and  Financial  Affairs  under  the 
direction of Marco Buti, Director General, and José Eduardo Leandro, Director of the “Policy, strategy 
and  communication”.  Executive  responsibilities  were  attached  to  Björn  Döhring,  Head  of  Unit 
“Economic  situation,  forecasts,  business  and  consumer  surveys”,  Evelyne  Hespel,  Head  of  Sector 
“Macro-economic  forecasts  and  short-term  economic  developments”,  and  the  forecast  coordinators, 
Reuben Borg and Suzanne Casaux. 

The  report  benefitted  from  contributions  by  Aurelija  Anciūtė,  Wojciech  Balcerowicz,  Nicolae  Biea, 
Reuben Borg, Chris Bosma, Lucian Briciu, Kathleen Burkhardt, Suzanne Casaux, Francisco de Castro 
Fernández,  András  Chabin,  Oliver  Dieckmann,  Violaine  Faubert,  Norbert  Gaál,  Mateja  Gabrijelcic, 
Oscar  Gomez  Lacalle,  Benedetta  Guerzoni,  John  Harnett,  Julien  Hartley,  David  Havrlant,  Andras 
Hudecz,  Jip  Italianer,  Isabelle  Justo,  Violeta  Klyviene,  Radoslav  Krastev,  Anna  Küffel,  Ivan  Kusen, 
João Miguel Leal, Julia Lendvai, David Lopes, Natalie Lubenets, Mart Maiväli, Wojciech Paczyński, 
Mona Papadakou, Gábor Márk Pellényi, Leonardo Pérez-Aranda, Samuli Pietiläinen, Mario Pletikosa, 
Simona Pojar, Félix Rodríguez Millán, Dan A. Rieser, Maja Semanovic, Sara Simoes, Michael Sket, 
Peeter  Soidla,  Ulrike  Stierle-von  Schütz,  Nuria  Subirats  Rebull,  Tsvetan  Tsalinski,  Ismael  Valdés 
Fernández, Milda Valentinaitė, Przemysław Woźniak, Alexandru Zeana, and Ingars Zustrups. 

Statistical  and  layout  assistance  was  provided  by  Salvador  Adrian  Ferrandis  Vallterra  and  Tomasz 
Zdrodowski. 

Support in editing was provided by Peter Koh. 

33 

adopted a regulation enacting the EU’s rebalancing measures in response to the US tariffs on steel and aluminium, which in a first stage target a list of products worth €2.8 billion.  These measures took effect on 22 June. Both Mexico and Canada also retaliated, imposing tariffs on the US exports of equal value to the affected value of their respective imports. Calendar effects on GDP growth  The number of working days may differ from one year to another. The Commission’s annual GDP forecasts are not adjusted for the number of  working days, but quarterly forecasts are. However,  the working-day effect in the EU and the euro area is estimated to be limited over the forecast horizon, implying that adjusted and unadjusted annual growth rates differ only marginally (by up to ±0.1 pps.). Geographical zones Euro area: EA19 (BE, DE, EE, IE, EL, ES, FR, IT, CY, LV, LT, LU, MT, NL, AT, PT, SI, SK and FI). European Union: EU28 (EA19, BG, CZ, DK, HR, HU, PL, RO, SE and UK). EU27: EU28 without UK  
 
 
 
 
 
 
 
 
 
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