Why Europe’s economy is forecast to remain in the doldrums

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Good morning. How’s this for a divided Europe: Yesterday, anti-immigration populist Robert Fico struck a coalition deal to return as prime minister in Slovakia, while some 300km to the west, Germany’s vice-chancellor called for more immigration to boost the country’s flagging economy. No surprise a new EU migration regime is proving so tough to nail down.

Today, our economics editor explains why the IMF’s latest prognosis for Europe makes for grim reading, while our energy correspondent reveals the list of European cities to be given special status in the 2030 climate race.

Sick man

The IMF’s latest economic outlook will, not for the first time, prompt hand-wringing in the euro area, writes Sam Fleming.

While the US enjoyed a (modest) upgrade to its growth forecasts, the euro area predictions were cut back — in no small part because of Germany’s current industrial weakness, according to the World Economic Outlook presented at the annual meetings of the IMF and World Bank on Tuesday.

Context: In the US, gross domestic product in 2023 is estimated to exceed its pre-pandemic path, the fund said. In the euro area, output remains 2.2 per cent below pre-Covid-19 projections. US growth will outpace that of the euro area both this year and next, as the US enjoys lower inflation.

The long-term trends further out in 2028 are not much rosier, with continued predictions for higher US growth than in the single currency area. This is feeding deeper concerns about Europe’s underperforming productivity, including companies’ slower adoption of leading digital technologies. 

In July, the IMF already admonished the bloc for failing to address its “long downward trend” in labour productivity versus the US.

Pierre-Olivier Gourinchas, the fund’s chief economist, told the FT that the most recent disappointments in European growth were not hard to explain.

He pointed out that last year’s energy price spike had hit Europe particularly hard given it’s an energy importer, in contrast to the US, a net energy exporter. “When energy prices are high,” he said, “they send the cheque to someone else.”

US households have also been particularly willing to dip into their excess savings, which has helped juice the consumer recovery since the pandemic.

The third difference boils down to fiscal policy, and the US government’s willingness to push up its deficit with little regard to longer-term sustainability.

Here’s the sting in the tail for the US. The IMF’s latest fiscal figures are gruesome, with the US deficit set to exceed 8 per cent of GDP this year and 7.4 per cent next year, against the euro area’s 3.4 per cent and 2.7 per cent. The fund reckons US public sector net debt will head above 100 per cent of GDP from next year.

How sustainable this fiscal laxity will be is one of the most consequential questions facing the world economy.

Chart du jour: Business case

European companies are increasingly aware of the consequences of climate change. According to a survey by the European Investment Bank published today, 64 per cent of businesses in the EU already have to deal with the physical impact of temperature changes, but only 13 per cent are covered by an appropriate insurance.

Green stars

Brussels has picked 10 cities to be given a Net Zero Cities Mission label today that approves their plans to reach climate neutrality by 2030, writes Alice Hancock.

A draft announcement, seen by the FT, says that the Spanish capital Madrid, Swedish capital Stockholm and less prominent cities such as Klagenfurt in Austria and Cluj-Napoca in Romania have been singled out to receive recognition for particularly ambitious plans to reach net zero.

Context: The label is the result of a project first started last year, gathering 112 cities in Europe and some third countries that have committed to climate neutrality by 2030. They should act as testing grounds for climate-friendly projects and technologies that can then be implemented elsewhere.

The label should help drive investment into the best projects, such as using the excess heat from data centres in district heating systems or innovative ways to manage waste.

The newly minted commissioner for the EU’s Green Deal, Maroš Šefčovič, told the FT that cities were “on the frontline” of the green transition and often had “ambitions exceeding those of their national authorities”.

According to one senior EU official, the key benefit of the initiative is bringing financial institutions such as the European Investment Bank into a room with private entrepreneurs and local authorities to push forward “bankable projects”.

Not all EU governments love the concept, however, as finance ministries don’t get oversight of the €127mn budget.

A commission report on the key barriers to cities’ transitions says that “national legislation is not always supportive of the transition” but “despite the unfavourable environment, cities have shown leadership within this space”.

What to watch today

1. EU foreign policy chief Josep Borrell begins a three-day visit to China.

2. Nato defence ministers conclude their two-day meeting.

3. Parliamentary elections in Gibraltar.

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