EU cuts growth outlook as inflation seen below ECB forecast

Brussels: The European Commission cut its growth forecasts for the euro area as the bloc’s largest economies struggle to put the ravages of the debt crisis behind them after two recessions in six years.

Gross domestic product (GDP) in the 18-nation region will rise by 0.8% this year and 1.1% in 2015, down from projections for 1.2 and 1.7% in May, the Brussels-based commission said on Tuesday. It lowered its projections for Germany, Europe’s largest economy, and said inflation in the euro area will be even weaker than the European Central Bank predicts.

“The legacy of the global financial and economic crisis lingers on,” said Marco Buti, the head of the commission’s economics department. “Slack in the EU economy remains large and is weighing on inflation, which is also being dragged down by tumbling energy and food prices.”

The bleaker outlook highlights the fledgling nature of the euro area’s recovery and the deflation threat that has compelled the ECB to take unprecedented stimulus measures. While unemployment is beginning to decline from a record high, core economies such as Germany and France are facing some of the growth challenges that afflicted the periphery at the start of the debt crisis.

Today’s report forecasts inflation at 0.8% in 2015, less than half the ECB goal of just under 2%. That’s more pessimistic than the central bank’s own projection of 1.1%. The commission sees inflation quickening to 1.5% in 2016, compared with the ECB outlook for 1.4%.

ECB stimulus

European stocks declined for a second day and German, French and Italian bonds rose. The yield on the German 10-year bund fell 4 basis points to 0.81% at 11:17 am London time. The Italian yield dropped 5 basis points to 2.37%. The Stoxx Europe 600 Index slipped 0.1%.

The grim assessment for the euro region comes just days before the ECB Governing Council led by President Mario Draghi gathers in Frankfurt for its monthly policy meeting. The ECB has cut its benchmark rate to a record-low 0.05% and began buying covered bonds to boost inflation and rekindle growth.

“Country-specific factors are contributing to the weaknesses of economic activity in the EU and the euro area in particular,” Jyrki Katainen, commission vice president for competitiveness, told reporters in Brussels. These include “deep-seated structural problems” and “public and private debt overhang,” he said.

The commission predicted GDP growth of 1.7% in 2016, lower than the ECB’s 1.9% published in September.

‘Fragile’ recovery

Unemployment in the 18-nation region will gradually decrease from 11.6% this year, the commission said, forecasting an average rate of 11.3% in 2015 and 10.8% in 2016.

The recovery is “not only subdued but also fragile,” it said. “With confidence indicators declining since mid-year and now back to where they were at the end of 2013, and hard data pointing to very weak activity for the rest of the year, it is becoming harder to see the dent in the recovery as the result of temporary factors only.”

In addition to a lower forecast for Germany, the commission cut its projections for France and Italy.

Italy’s economy, the third largest in the euro area and in its third recession in six years, will shrink 0.4% this year, according to the commission. It predicted growth of 0.6% in 2015, half the pace expected in May.

The country’s debt pile — the second largest in the euro zone after Greece — will hit 133.8% of GDP next year before slipping to 132.7% in 2016. That’s still higher than the 132.2% anticipated for 2014.

German stagnation

The commission expects Germany to stagnate in the second half. It sees growth of 1.1% in 2015 and 1.8% in 2016. The 2015 outlook compares with 2% in May.

“Growth is set to resume gradually with the support of a robust labour market, favorable financing conditions and improving external demand,” the commission said.

As France spars with EU budget monitors over spending controls, European forecasters see the country’s deficit widening to 4.4% of GDP in 2014, compared with a forecast 3.9% in May and above the EU’s 3% limit. In 2016, the deficit will be 4.7%.

France’s structural deficit — which strips out the effects of the economic cycle — will deteriorate from 3% in 2014 to 3.4% in 2016.

Economic growth in Spain is projected to accelerate to 1.7% next year and 2.2% in 2016 from 1.2% this year, underpinned by domestic demand.

The commission said Spain’s budget deficit, pegged at 5.6% of GDP this year, will narrow to 4.6% in 2015 and to 3.9% in 2016. Bloomberg