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US dollars are exchanged for euros at a currency exchange in Lisbon. Image Credit: Bloomberg

Brussels: Global trade tensions, Italy’s fiscal battles and US overheating pose risks to the euro-area economy, the European Commission warned as it lowered its forecast for the coming year.

The commission sees the 19-nation economy expanding 2.1 per cent this year. For 2019, it sees growth slowing to 1.9 per cent, down from 2 per cent forecast in July.

While the list of threats in the commission’s report aren’t a surprise, they come amid mounting signs of a persistent slowdown in the euro area.

The European Central Bank (ECB) has said growth is merely stabilising at a more sustainable pace, but there’s a question of whether there’s worse to come.

“Uncertainty and risks, both external and internal, are on the rise and start to take a toll on the pace of economic activity,” Valdis Dombrovskis, EU Commission Vice-President for the Euro, said.

Some of the recent weakness is related to one-off factors such as a drop in German car production. The Bundesbank says Europe’s largest economy may have stagnated in the third quarter, but HSBC said it may actually have contracted. While growth will return this quarter, “the underlying trend is not anywhere near as strong as it was,” HSBC said.

The euro area’s slowdown, if it persists, would feed into fears of a global economic cooling and complicate options for the ECB as policymakers prepare to cap asset purchases this year. The EU executive arm warned that there is a “high degree of uncertainty” and there are many interconnected downside risks.

On inflation, the commission raised its 2018 forecast to 1.8 per cent and left its 2019 prediction at 1.6 per cent. The figures are broadly in line with those from the ECB.

Among them is overheating in the US due to fiscal stimulus, which could mean faster Federal Reserve interest-rate increases, with spillovers to emerging markets. The EU could also suffer due to its strong trade links and banks’ exposure.

Closer to home, the commission said that doubts about the quality of public finances in highly-indebted countries like Italy could raise financial stability concerns. The EU sees the country’s deficit widening in the next two years and warned of intensifying downside risks.

Italy gets a downbeat growth forecast

For Italy, the European Commission’s latest forecasts see growth of just 1.2 per cent next year, below the populist government’s 1.5 per cent target. That has implications for the budget deficit, which the EU sees widening in the next two years, breaching the 3 per cent limit in 2020.

The projections come amid a standoff between Brussels and the government in Rome over the latter’s spending plans. The commission has rejected the budget, but Italy is showing little inclination to revise it.