European commission says UK will join Italy at foot of growth league even with a soft Brexit

This article is more than 1 year old

This article is more than 1 year old

The UK will sink to the bottom of the European economic growth league next year to join Italy as the slowest-growing economy in the EU, before falling further the year after to anchor the table alone, according to European commission forecasts.

The EU’s gloomy predictions are based on a soft Brexit – meaning Britain is expected to lag behind all its EU peers even if Theresa May can reach a deal with Brussels before 29 March.

The commission forecast that consumer spending growth will remain weak, continuing a subpar performance since the EU referendum in June 2016. It said business investment would remain subdued, while external demand for UK goods will dwindle. The commission predicted the result would be GDP growth of 1.2% in 2019 and 2020.

The euro area of 19 countries including Germany, France and Italy is forecast to slow from a growth rate of 2.1% this year to 1.9% in 2019 and 1.7% in 2020, as the wider region enters a period of weaker growth following the strongest year of the past decade in 2017.

It comes as the wider global economy is unsettled by Donald Trump’s trade disputes with China and Europe, which have reduced demand for manufactured goods and stifled business investment.

Despite the weaker outlook for the UK economy, growth figures have shown Britain managing a better performance than the eurozone over recent quarters.

Statistics due on Friday are expected to show UK economic growth of 0.6% for the third quarter. Economists at HSBC believe Germany is likely to record its first drop in quarterly economic output, of 0.1%, for more than three years.

The wide range of potential outcomes from the Brexit talks will also have a significant bearing on the future path of the economy. Assuming a deal is secured, analysts at the consultancy Capital Economics believe growth could accelerate to 2.2% next year and remain around 2% in 2020.

The commission forecasts came as the International Monetary Fund also sounded the alarm over the mounting risks from no-deal Brexit, while warning about the threat from trade disputes around the world and high levels of Italian government debt.

In the IMF’s latest health check on the region, it warned the European economy would probably run into turbulence in the next few years.

The Washington-based fund said all likely Brexit outcomes would have a negative cost for the economy, although it warned a no-deal scenario would have the biggest downsides.

“No-deal Brexit would lead to high trade and non-trade barriers between the UK and the rest of the EU, with negative consequences for growth,” it said.

The IMF also warned the populist Italian government to tackle its high levels of government borrowing before time runs out.

In a rebuke to the Italian government, which is currently locked in a bitter standoff with the commission over its budget plans for next year, the IMF regional director for Europe, Poul Thomsen, said Italy needed to urgently rebuild strength in its public finances.

“We basically agree with the commission’s assessment [on Italy’s budget],” he said.

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The commission has demanded Italy resubmit its tax and spending plans ahead of a deadline next week, because it argues the proposals break commission rules over government borrowing. The Italian government has so far however refused to change course, insisting it will not “kneel” before the EU.

Although Italy’s tax and spending plans may help stimulate its economy, Thomsen said they could have the opposite effect, given that Italy has the second-highest national debt in Europe, after Greece, of more than 130% of GDP.

“[Growth is] not going to come from fiscal stimulus,” Thomsen said. “Italy does not have space for [raising spending]. You could see a situation where expansion of fiscal policy had a negative impact on growth … the cost to Italian borrowing will go up and you actually end up slowing the economy.”