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Tags: eurozone | economy | deflation | forecasts

EU Raises Eurozone Outlook, Confirms Deflation

Thursday, 05 February 2015 09:37 AM EST

The EU raised its growth forecast for the eurozone on the back of cheap oil and a weak euro, but warned that with deflation taking hold the bloc's struggling economies must keep up their reforms.

Economic Affairs Commissioner Pierre Moscovici said France must take further steps to reduce its budget deficit and that Greece's new government must respect its commitments to its creditors as global alarm over the debt crisis mounts.

For the first time since 2007, all of the countries in the 28-nation EU are forecast to grow, said the European Commission, the EU's executive arm.

The latest forecast published by the Commission predicted the economy across the 19 countries that use the euro will grow by 1.3 percent in 2015 instead of the 1.1 percent forecast in November.

But it now sees consumer prices across the eurozone falling by 0.1 percent in 2015, a situation that has already pushed the European Central Bank to take unprecedented action to drive up prices.

"The fall in oil prices and the cheaper euro are providing a welcome shot in the arm for the EU economy," said Moscovici in a statement.

"There is still much hard work ahead to deliver the jobs that remain elusive for millions of Europeans."

The forecast said Greece should grow by 2.5 percent in 2015 and then 3.6 percent in 2016, but stressed that was based on the "full implementation" of the country's international bailout program, which the new government in Athens has promised to scrap.

Greece's new finance minister was in Berlin for tough talks with his German counterpart Thursday, after the European Central Bank piled fresh pressure on Athens by restricting Greek banks' access to much-needed cash.

The growth forecasts were welcome news for the governments of France and Italy, whose problematic spending plans will face an EU verdict later this month.

The EU said growth in France will hit one percent in 2015 instead of the 0.7 percent it had forecast previously — allowing Brussels and Paris to align a deficit forecast of 4.1 percent of GDP for this year, even if it is way over the 3.0 percent of output limit.

But Moscovici said France — the second biggest economy in the eurozone after Germany — had to take "supplementary measures" to cut its deficit and implement structural reforms.

Italy meanwhile should claw out of recession with weak growth of 0.6 percent this year, the EU said.

Cheaper global oil prices are driving down inflation in the eurozone. In November, the Commission still believed prices would rise 0.8 percent in 2015 and the reversal is a significant one.

With decreasing prices now confirmed, the ECB last month finally decided to embark on a quantitative easing program involving the purchase of 1.14 trillion euros ($1.29 trillion) in sovereign bonds.

"This is an important program that is having a positive effects on confidence and access to credit," Moscovici said at a news conference, adding that he believed inflation would be returning towards the ECB's target level of just under 2.0 percent.

The quantitative easing program is meant to avoid the eurozone falling into a deflationary spiral in which businesses and households delay purchases, thus throttling demand, triggering a recession and causing companies to lay off workers.

The Commission said the effects of low oil would taper off this year and predicted positive, but still low, inflation of 1.3 percent in 2016.

"The impact of stronger domestic demand, the depreciation of the euro and an assumed gradual recovery in energy prices should push inflation noticeably higher," the Commission said in the report.

The Commission said that unemployment would fall very slightly in 2015, to 11.2 percent. Joblessness in the single currency zone now stands at 11.4 percent.

© AFP 2023

The EU raised its growth forecast for the eurozone on the back of cheap oil and a weak euro, but warned that with deflation taking hold the bloc's struggling economies must keep up their reforms.
eurozone, economy, deflation, forecasts
Thursday, 05 February 2015 09:37 AM
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