EU forecast identifies risk of unsustainable external gaps.
EU forecast identifies risk of unsustainable external gaps. The EU Autumn Forecast anticipates continuous broad-base recovery with the GDP growth bouncing back to 7.2% this year and remaining robust above 5% over the next two years, but it also identifies the risk that pro-cyclical public expenditure policy to add to household consumption and generate an excessive expansion of domestic demand and an unsustainable widening of external imbalances. The CA gap is expected under the baseline scenario to hit 13.3% of GDP in 2008, up from 8.7% last year. This year’s CA gap is seen at 10.3%, 1pps above the government’s forecasting body projection issued earlier this week. The fiscal deficit projections were downward revised on the back of better than expected tax collections and the Property Fund project (generating fiscal deficit under EU accounting standards) advancing only slowly. Thus, the general government’s budget deficit is seen at 1.4% of GDP this year and 2.6% in each of 2007-08 years. However, the share of current expenditures, namely social transfers, wage expenditures and similar will increase as a share of GDP. The investment expenditures will also grow faster than GDP.