The EU slashed its growth forecasts for the euro zone Thursday, saying global trade tensions are set to weigh on the region and limit economic expansion.
The warning from the EU's executive arm, the European Commission, comes at time when the European Central Bank (ECB) has started a new round of stimulus to prop up fragile growth.
"The fact that growth is no longer expected to rebound meaningfully in the next two years is a major shift compared to previous forecasts and is based on the assessment that many features of the global slowdown will be persistent," the European Commission said Thursday in its Autumn Economic Forecasts report.
"Most importantly, the surge in trade tensions and record-high uncertainty about trade policies is likely to have inflicted lasting damage to world trade," the Commission added.
Uncertainties surrounding trade include: The future relationship between the U.K. and the EU as both need to establish new trading rules post-Brexit; new consumer preferences in the car industry and volatility in U.S.-China trade.
As a result, the Commission slashed its economic forecasts for the euro zone in 2019 and 2020. The 19-member region is now set to grow at a pace of 1.1% this year and 1.2% in 2020. In its previous forecasts, out in May, the European Commission had estimated a 1.2% growth rate for the euro zone in 2019 and 1.5% for 2020.
"We are entering a new period. For seven years we had consecutive growth and for the last three years, until 2019, a very substantial rate. This is obviously not the case anymore," Pierre Moscovici, the EU's economics commissioner told reporters on Thursday.
"We still have growth and so we are not at all preparing any kind of recession scenario," he said.
However, Moscovici also said:"We don't expect now a rebound in 2020 and 2021, which was the case before. So we are in a period of plateau of few years and we must take care that this plateau is not a ceiling, since we have on the other hand downside risks that could materialize."
Moody's credit rating agency said Tuesday that income inequality has worsened in Europe over the last 30 years. "Evidence has shown that income inequalities can weaken potential growth due to its effects on health and education outcomes. Rising or elevated income inequality can also affect policy preferences and can contribute to reduced support for free trade," Moody's said in its report.
Italy — the slowest growing economy
Italy is set to grow 0.1% this year and 0.4% in 2010 — the lowest pace across the euro zone and the wider European Union. Last April, the European Commission estimated a 0.7% growth rate for Italy in 2020.
"Italy's economy stalled at the beginning of 2018 and still shows no signs of a meaningful recovery," the European Commission said Thursday.
Italy's public debt pile — the second highest in Europe is set to grow from 136.2% in 2019 to 137.4% in 2021. The unemployment rate is set to remain at 10% between 2019 and 2021.