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EU cuts growth outlook on weak inflation

Eurozone growth forecast cut from 1.1% to 1.7%

By Korea Herald

Published : Nov. 5, 2014 - 20:43

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BRUSSELS (AFP) ― The EU sharply cut its growth forecasts for the eurozone on Tuesday, warning that France and Italy remain huge problems for the sluggish European economy that is becoming a worry worldwide.

The threat of deflation and recession combined with stubbornly high unemployment across the eurozone loomed large in the European Commission’s autumn economic forecasts.

In a grim set of numbers, it cut its 2014 growth prediction for the 18-country area to just 0.8 percent from the previous 1.2 percent, then predicted expansions of 1.1 percent in 2015 and 1.7 percent in 2016.

EU officials called for urgent investment to boost jobs and growth, amid fears that just two years after its last debt crisis, the eurozone could again destabilize the global economy.

“The economic and employment situation is not improving fast enough,” said Jyrki Katainen, the commission’s new vice president for jobs and growth.

European markets on Tuesday sank on the dire forecasts, with shares in Paris down a sharp 1.5 percent and Milan off more than two percent.

With years of austerity failing to reanimate the eurozone, new European Commission president Jean-Claude Juncker has promised to unveil a 300 billion euro ($380-billion) investment plan for the eurozone by Christmas.
European Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici (right) and European Commission Vice-President and Commissioner for Jobs, Growth, Investment and Competitiveness Jyrki Katainen address a press conference on European economic forecasts at the EC headquarters in Brussels on Tuesday. (AFP-Yonhap) European Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici (right) and European Commission Vice-President and Commissioner for Jobs, Growth, Investment and Competitiveness Jyrki Katainen address a press conference on European economic forecasts at the EC headquarters in Brussels on Tuesday. (AFP-Yonhap)

But despite apparently avoiding a so-called “triple-dip” recession, the eurozone headwinds on the world economy have caused turmoil on global stock markets in recent weeks.

Pierre Moscovici, the new commissioner for economic affairs, warned that there would also be hard work ahead to both bring in investment and for eurozone nations to bring in structural reforms.

“There is no magic bullet, there is no simple answer,” Moscovici told the same press conference.

Also haunting Europe is the danger of deflation, and while the commission believes prices will not fall outright, it said inflation will remain very low and drag on growth.

The commission said inflation in the eurozone this year would sink to a “very low” 0.5 percent and rise only to 0.8 percent next year ― both way off the European Central Bank target of just under two percent.

Unemployment in the eurozone, already sky high in several crisis-hit countries, will remain a huge problem in the next few years, it said. The rate would slip to 10.2 percent in 2016, still above pre-crisis levels and with Spain and Greece both at 22 percent.

Germany emerges as a worry from the EU figures, with the economy, normally seen as the continent’s growth engine, set to expand by a sluggish 1.3 percent in 2014 and just 1.1 percent next year.

But France and Italy stand out as the biggest problems. Both are under huge pressure from the commission to cut back on overspending and push through reforms that Rome and Paris have promised but largely failed to implement.

France’s economy is predicted to grow just by 0.3 percent this year ― against an earlier forecast of 1.0 percent ― and expand by 0.7 percent in 2015.

Brussels said France was also on track for the biggest budget deficit in the eurozone, surging to 4.5 percent of total GDP in 2015 and 4.7 percent in 2016, putting Paris at risk of being sanctioned by the commission for exceeding the EU limit of 3.0 percent.

In Paris, a finance ministry source said the EU figures were “purely theoretical” and “meant nothing,” while sticking to its own forecast that France would reach the EU’s limit in 2017.

Italy meanwhile will stay in recession for a third consecutive year with a contraction 0.4 percent, followed by 0.6 percent growth next year, while staying burdened by debt.

Britain and Ireland gave the most cause for optimism, with the non-euro British economy set to grow by 3.1 percent this year and 2.7 percent next year, and Ireland by a whopping 4.6 percent this year and 3.6 percent next year.

Moscovici warned however that without strong action to create jobs and growth “people could despair of the European project.”

Analysts agreed with the call for investment.