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After showing resilience to global economic challenges last year, the 19-member eurozone's economic outlook is positive, with recovery expected to continue this year and next, the European Commission announced in a report on Monday.
For the first time in nearly a decade, the economies all European Union (EU) members are expected to grow throughout the forecasting period (2016-2018), despite higher-than-usual uncertainty surrounding predictions, the European Commission said in its Winter 2017 Economic Forecast
Germany, the largest economy in the single-currency bloc, will further strengthen its growth in the coming two years. Its gross domestic product (GDP) is expected to increase by 1.6 percent in 2017, slowed down by fewer working days, and 1.8 percent in 2018.
France, whose GDP growth declined slightly to 1.2 percent in 2016, is forecast to pick up to 1.4 percent in 2017 and 1.7 percent in 2018 under the usual no-policy-change assumption.
Besides, the troubled Greece economy is projected to have increased by 0.3 percent in 2016.
Contingent upon the timely completion of the second review of the ESM program, Greece's economic recovery is expected to pick up in 2017 with a growth of 2.7 percent, on the back of improving financial conditions amid a gradual relaxation of capital controls.
Its GDP is expected to continue recovering at a robust pace in 2018, with a growth rate of 3.1 percent.
In the eurozone as a whole, the report predicted a growth of 1.6 percent in 2017 and 1.8 percent in 2018, a slight revision up from the Autumn Forecast following performances in the second half of 2016 that were better than expected, as well as a strong beginning to 2017.
Meanwhile, economy growth in the 28-member bloc--the EU, should follow suit and is predicted at 1.8 percent this year and next.
Inflation in the eurozone has recently picked up as the past drop of energy prices has recently given way to an increase. Having been very low over the past two years, inflation is now set to reach higher levels this year and next.
Overall, inflation in the eurozone is expected to increase from 0.2 percent in 2016 to 1.7 percent in 2017 and 1.4 percent in 2018. In the EU, inflation is forecast to rise from 0.3 percent in 2016 to 1.8 percent in 2017 and 1.7 percent in 2018.
The report said domestic demand in the form of private consumption will remain the backbone of the recovery, with moderate growth in investment expected to continue.
Overall, investment in the eurozone is forecast to grow by 2.9 percent this year and by 3.4 percent in 2018 ( 2.9 percent and 3.1 percent in the EU), up 8.2 percent by now since the start of the recovery in early 2013.
However, the report noted that the share of investment in GDP remains below its value at the turn of the century (20 percent in 2016 compared to 22 percent in 2000-2005). It warned that consistent weakness in investment casts doubt over recovery's sustainability, as well as potential economic growth.
Sovereign debt and public deficits have declined and are expected to fall further in 2017 and 2018 in the eurozone, according to the report.
The public deficit for the eurozone is expected to decline from 1.7 percent of GDP last year to 1.4 percent in 2017 and 2018. The debt-to-GDP ratio is expected to diminish gradually from 91.5 percent in 2016 to 90.4 percent in 2017 and 89.2 percent in 2018.
The European Commission attributed the decline to exceptionally low interest rates. "It also reflects further improvements in the labour market: more people are paying taxes and contributions, and fewer are receiving social transfers," the report said.
However, the European Commission warned that risks surrounding these projections were "exceptionally large" and, although both upside and downside risks had increased, the overall balance remained tilted to the downside.
The "particularly high uncertainty" was due to the as yet unclarified intentions of the new administration of the United States in key policy areas, as well as the numerous elections to be held in Europe this year and the upcoming Article 50 negotiations with Britain, the EU executive arm said.
Furthermore, fiscal stimulus in the United States could have a stronger impact on growth than currently expected in the short term while Brexit, as well as Washington's faster monetary tightening stemmed medium-term risks, it added.
Speaking of the uncertain times, Valdis Dombrovskis, European Commission Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, remarked: "It is important that European economies stay competitive and able to adapt to changing circumstances. This requires continued structural reform effort. We also need to focus on inclusive growth, ensuring that the recovery is felt by all."
"We cannot expect current monetary stimulus to last forever," he warned. "Therefore countries with high deficit and debt levels should continue bringing them down to become more resilient to economic shocks."
Noting the resilience of the European economy following numerous shocks, Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, counseled that, "with uncertainty at such high levels, it's more important than ever that we use all policy tools to support growth. "