EU cuts eurozone growth forecasts

The European Commission on Tuesday cut its growth forecasts for the eurozone and the European Union, citing the tensions in Ukraine and the Middle East along with a lack of investment.



The EU's executive arm now also expects inflation in the eurozone to remain below the close-to 2 per cent targeted by the European Central Bank until at least 2016. That is likely to boost expectations of stronger measures by the ECB such as large-scale purchases of government bonds and other assets.



The commission said it now expects gross domestic product in the 18-country eurozone to grow 0.8 per cent this year, down from 1.2 per cent growth it forecast this spring. In 2015, the eurozone economy will likely grow 1.1 per cent, also less than the 1.7 per cent growth seen in the spring. In 2016, growth in the currency union will rise to 1.7 per cent, the commission said.



The forecasts for the eurozone were dragged down by lower than-expected growth in big countries, including Germany, France and Italy, the latter of which expected to fall back into recession this year.



The picture looks only mildly better for the broader EU. The 28 EU countries are now expected to grow on average 1.3 per cent this year, down from 1.6 per cent growth seen in the spring. Next year, EU GDP is expected to rise 1.5 per cent, also below the 2 per cent previously forecast. In 2016, growth is seen reaching 2 per cent.



"The economic and employment situation is not improving fast enough," said Jyrki Katainen, the European Commission's vice-president for jobs and growth. "The European Commission is committed to use all available tools and resources to deliver more jobs and growth in Europe."



Significantly for investors, the commission said eurozone inflation is likely to be 0.5 per cent this year and 0.8 per cent in 2015. Even in 2016, inflation in the currency union is forecast at just 1.5 per cent, still below the close-to-2 per cent targeted by the ECB, the commission said. Those 2014 and 2015 forecasts undershoot the ECB's own inflation expectations released in September. At the time, the ECB said it expected eurozone inflation to be 0.6 per cent this year and 1.1 per cent in 2015.



Low growth and low inflation will make it much harder for the eurozone to recover from its debt crisis, causing big problems for high-debt countries such as Greece, Italy and Spain, among others.



Although most analysts don't expect the ECB to announce new measures to stimulate inflation at its meeting on Thursday, Tuesday's forecasts are likely to raise expectations of future action, including larger-scale asset purchases as were previously done by the US Federal Reserve and the Bank of England.



Tuesday's forecasts also form the basis for the commission's assessment of national governments' 2015 budgets. While the lower-than-expected growth could mean some countries get extra time to bring their deficits below the 3 per cent of GDP allowed under EU law, they are also likely to underpin demands for new cuts in some countries, including France and Italy. According to the forecasts, both Paris and Rome will fail to cut their 2014 deficits by as much as previously promised, even when the effects of the weak economy are stripped out.