Brighter times have arrived for Europe's economies

A recent report from the IMF has suggested that the outlook for Europe’s economies is improving. All European economies grew in 2017, and the IMF says that the outlook remains favourable in the short run.

The IMF report notes that real GDP in Europe increased by 2.8% in 2017, a full percentage point faster than the previous year. It also pointed out that, for the first time since the global financial crisis of 2008, all economies posted gains.

Despite this rosy picture, the IMF believes that action is needed to prevent the growth momentum slowing in the medium term. Poul Thomsen, Director of the IMF’s European Department says, “policymakers should seize the moment to lower their deficits and debt and push forward with reforms to make their economies more productive”.

Consumption and investment were both positive contributors to the growth pick up. The IMF warns however that availability of skilled staff is one potential barrier to medium-term growth prospects. This is particularly the case for the countries that have joined the EU more recently. These countries have seen significant emigration of skilled workers.

The original EU member countries have seen very limited wage rises in recent years. This is a pattern seen in most developed economies including Australia. On the other hand, the IMF notes that the 12 countries that joined the EU in 2004 and 2007 have seen rapid wage growth over the past three years. Without improvements in productivity, the IMF expresses concern that this could prove a barrier to competitiveness in the longer-term.

One area where there has been improvement is the issue of problem loans. While almost all countries have seen a fall in non-performing loans from the peak, the stock of bad loans is still high in several European countries. These problem loans continue to weigh on the banking sector and its ability to provide credit to support economic growth.

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