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European Commission 2014 EU-wide Stress Test Baseline Scenario Summary

Core Content

The European Commission's Directorate General for Economic and Financial Affairs (DG ECFIN) produced the 2014 EU-wide stress test baseline scenario projections, which are based on the winter 2014 economic forecast extended to 2016 using a model-based approach. These projections are not part of the official European Economic Forecast and are specifically derived for the stress test exercise.

Main Economic Projections (2014–2016)

GDP Growth

• 2014: Expected to grow by 1.5% in the EU and 1.2% in the euro area.
• 2015: Growth is projected to accelerate to 2.0% in the EU and 1.8% in the euro area.
• 2016: Further growth is anticipated at 1.8% in the EU and 1.7% in the euro area.

Unemployment Rates

• 2014: Unemployment is expected to remain high, with a modest rise in employment.
• 2015: Projected to decline to 10.4% in the EU and 11.7% in the euro area.
• 2016: Unemployment is forecast to reach 10.1% in the EU and 11.3% in the euro area.

Inflation (HICP)

• 2014: Inflation is expected to remain subdued at 1.2% in the EU and 1.0% in the euro area.
• 2015: Inflation is projected to rise slightly by 0.25 percentage points.
• 2016: Inflation is forecast to increase to 1.5% in the euro area and 1.7% in the EU.

House Price Projections (2014–2016)

• EU-wide:

  • 2014: Nominal house price growth of 0.9%.
  • 2015: Growth of 2.7%.
  • 2016: Growth of 3.8%.

• Euro Area:

  • 2014: House prices are expected to decrease by 0.2%.
  • 2015: Growth of 2.1%.
  • 2016: Growth of 3.8%.

Methodology and Assumptions

Data and Cut-off Date

• The winter 2014 forecast was based on data up to 17 February 2014.
• It incorporated validated annual public finance data from Eurostat, published on 21 October 2013.

External Assumptions

• Exchange and Interest Rates: Averaged from a 10-day reference period (31 January to 13 February) to reduce volatility.
• Exchange Rates: Standardised using fixed nominal exchange rates.
• Interest Rates:
  • Short-term rates for the euro area derived from futures contracts.
  • Long-term rates calculated using implicit forward swap rates, adjusted for the spread between interest rate and swap rate.

Policy Assumptions

• For 2014, the forecast included budgets adopted or presented to national parliaments and other detailed measures.
• For 2015, the assumption was "no policy change", implying the extrapolation of revenue and expenditure trends.

House Price Model

• A panel error-correction model was used, based on data from 1970–2012 for most EU Member States.

• The model includes five fundamental variables:

  • Inflation-adjusted house price
  • Total population
  • Real housing investment
  • Real disposable income per capita
  • Real long-term interest rate

• Country-specific adjustments were made to model parameters:

  • Reduced speed of reversal to equilibrium for countries with less reliable data (e.g., Poland) or gradual price correction (e.g., Germany).
  • Reduced inertia in price changes for countries with sharp corrections (e.g., Greece, Croatia).

• Expert insights were also integrated, such as adjustments for the UK based on market momentum and further reductions in downward inertia for Greece and Cyprus.

Key Points

• The projections for 2016 are model-based and not part of the regular EC forecast.
• The methodology combines supply and demand side effects to ensure internal consistency.
• The GDP forecast integrates potential output and output gap.
• Inflation is projected based on the output gap.
• Unemployment rate projections are based on NAWRU and unemployment gap.
• The model-based approach is considered more reliable for longer-term projections due to reduced error compared to judgmental forecasts.