Absent reform, region faces serious demographic, productivity challenges.

European economic growth potential is poised to slow significantly in the years ahead, driven by population aging and lagging productivity, says Moody’s Ratings.

In a new report, the rating agency warned that trend GDP growth is projected to slow from its current level of 1.8% to just 1.2% by 2033 — with the trend dropping to less than 1% in the region’s three largest economies, Germany, France and Italy.

“We expect a significant decline over the next decade, driven by an aging population,” it said, noting that its forecast factors in projected trends in demographics, immigration, labour force participation and productivity, among other considerations.

“Without policy action, the slowdown in trend growth could lower our view of countries’ economic strength, a key credit consideration,” it also warned.

Indeed, Moody’s said that its economic strength assessments would likely decline by one notch for most European countries, while dropping two notches for Croatia and Cyprus.

The negative demographic picture could be at least partly offset by policies to boost immigration, improve labour participation and enhance productivity, it noted.

“In the short-term, an increase in skilled worker migration is likely to mitigate the effect of adverse demographic trends. Longer term, higher immigration and rising participation rates can help soften the effect of aging populations,” it said.

“However, significant domestic reforms to boost labour market participation would be needed to prevent steady shrinking of the labour force,” it added.

Additionally, the outlook could be helped by reforms that aim to enhance productivity.

“These include reforms expected to yield positive results in the near-to-medium term such as cutting bureaucracy, more effective EU funds targeting and additional infrastructure investment,” it said — adding that longer term reforms are needed to help shift toward more productive industries, to support research and development and to increase and enhance the efficiency of education spending.

“However, the prospect of and commitment to implementing comprehensive reforms are still unclear at this stage,” it cautioned.