Opinion on the macroeconomic assumptions of the 2016-2019 Stability Program

The High Council of public finance delivers on 12 April 2016 an opinion on the macroeconomic assumptions associated with the Stability Program for the years 2016 to 2019.

Opinion's summary

After two years of stagnation in 2013 and 2014, the Euro area has experienced a moderate recovery for one year (with an annual growth rate slightly higher than 1,5 % of GDP).

This rising growth is triggered by three simultaneous factors: lower energy prices, a depreciating euro, and the reduction of budget cuts. In addition, the more expansive monetary policy induces exceptionally low interest rates. Lastly, tensions on financial and credit markets, which penalized peripheral Eurozone countries, have eased substantially.

Nevertheless, the ongoing European recovery may not be able to resist further deteriorations in the extra-European economic environment (slowdown in Chinese growth, hardships of oil-producing countries, risk regarding the ability of the US economy to maintain its current pace of growth in the medium term) or emerging barriers to growth in Europe (re-establishment of border controls, exit of the United Kingdom from the European Union, geopolitical risks and terrorist threats).

The growth forecasts submitted by the Government remain unchanged in line with the initial Budget bill for 2016 (1,5 %), and with the Stability Programme of April 2015 for 2017 and 2018 (respectively 1,5 % and 1¾ %). Concerning 2019, a growth of 1,9 % is expected by the Government.

With regard to 2016, the High Council of public finance considers that the Government’s forecast, although situated in the upper range of economic forecasts, remains within reach. The 2,3 % increase in the private wage bill expected by the Government seems a little high. The downwards revision of the inflation forecast made by the Government is moving in the right direction and the annual average consumer price inflation will probably be close to zero in 2016.

Concerning 2017, 2018 and 2019, the High Council reckons that the GDP growth scenario is plausible, even if the acceleration of growth hypothesis at the end of the period is fragile. The High Council also points out the downwards risks attached to this scenario, either related to the world growth or earmarked to the Eurozone.

However, the potential growth submitted by the Government seems overestimated, in particular in 2016-2017, and the persistence of a significant output gap throughout the period is unlikely to occur.

The High Council considers that this substantial output gap, higher than most existing estimates, tends to increase the cyclical component of the deficit and to underestimate the structural deficit. The High Council emphasizes the fact that this underestimation minimizes the effort needed in order to reach a balance in public finance in the medium term