EU Commission downgrades United Kingdom growth for Brexit year to 1.1%

The European Commission said on Thursday it has raised its projection for Romania's economic expansion in 2017 to a real 5.7% from 4.3% forecast in May, but warned that the government's policy uncertainties could hamper growth. Tax cuts, in particular a cut of the standard VAT rate by 1 percentage point have reduced tax revenues.

The Commission also dropped its United Kingdom growth forecast for this year from 1.8 to 1.5 per cent. "It is without a doubt that we are entering a new phase in the European economic recovery".

In detail, the European Commission indicates that the fiscal performance of Cyprus continues to be strong and has again outperformed the government's budgetary targets. Investment is also picking up amid favorable financing conditions and considerably brightened economic sentiment as uncertainty has faded, suggesting that the European citizens move forward, leaving the economic crisis in the past, as the economies of all EU-member states are expanding and their labour markets improving, but wages are rising only slowly.

Unit labour costs are predicted to rise faster than euro-area average for 2018 and 2019.

But for the first time, risks surrounding the economic outlook are "broadly balanced" instead of "tilted to the down side". This positive outlook is expected to benefit the current-account balance, with moderate surpluses forecast for the coming years.

The threats were evident in the bloc's forecasts for 2018 and 2019, when economic growth is expected to slow down.

France's debt was still high at 96.9 percent and would remain at that level through 2019.

With current surveys already suggesting that heightened uncertainty is weighing on business investment in the United Kingdom, the EC report forecast investment growth will weaken in 2018, as many firms are likely to continue deferring investments in the face of uncertainty.

Domestic demand was the main driver of growth with both private and public consumption projected to expand strongly in 2017, while last year's "significant contribution" to growth from net exports was set to diminish this year, as imports grew faster than exports, the EC said.

The closure of the second review in June 2017, together with the stronger-than-expected growth in the euro area and a favourable tourist season, are expected to strengthen the economy in the remainder of the year.

United Kingdom growth slowed down this year - to 1.5 percent from 2.3 percent in 2015 and 1.8 percent in 2016 - because higher prices led to lower consumption.

"Investment in construction is projected to contribute substantially to growth in domestic demand, with the strong momentum in residential property investment in 2016 expected to continue in the medium term, supported by government policies", the commission says.

The Commission expects an export recovery in the second half of this year, after somewhat weaker results in the second quarter, thanks to high external demand and further integration into European Union markets.

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