EU sees lower euro zone 2008 growth, higher inflation (Reuters)
10.09.2008 15:05 Business
Updating its economic forecasts, the European Union executive slashed its prediction for gross domestic product growth for the 15 nations using the euro to 1.3 percent from the 1.7 percent predicted in April, as the OECD did on September 2.
In 2007, euro zone gross domestic product (GDP) grew 2.6 percent.
The Commission cautioned that its new forecast for the euro zone could still prove too strong, and its figures showed the bloc's biggest economy, Germany, in recession, with GDP shrinking 0.2 percent in the July-September period after contracting 0.5 percent in the previous three months.
Spain, whose housing bubble has burst, will also go into recession in the second half of the year, as will Britain, the Commission forecast.
Both France and Italy, whose economies shrank 0.3 percent in the second quarter, would only stagnate in the third.
"The main downside risks identified in the spring forecast have materialized, with the financial turmoil deepening, commodity prices soaring and the shocks to several housing markets spreading more widely," the Commission said.
The Commission raised its inflation estimate for this year to 3.6 percent from 3.1 percent previously. That is almost twice the European Central Bank's target of keeping inflation below, but close to, 2 percent.
"This represents an upward revision, although inflation could be at a turning point as the impact of past increases in energy and food prices gradually fades in the coming months," the Commission said.
It said risks to the growth outlook remained more on the downside, and if they materialized, growth could be 1.1 percent this year rather than 1.3 percent.
"Risks to the inflation outlook (remain) more on the upside as the euro area might witness some second-round effects on inflation in the rest of the year, although there is no evidence of any widespread effects so far," the Commission said, referring to the risk of a wage-price spiral.
The Commission forecasts on growth for 2008 are in the lower end of the ECB's forecast range while on inflation they are in the upper end of the ECB projection range.
RISKS TO INFLATION
The Commission said there had so far been only limited evidence of high oil and food prices driving up wage demands and prices in other sectors.
"However, the risk of such effects cannot be excluded, especially if (low) inflationary expectations were to become less well anchored," the Commission said.
"Moreover, the oil market remains tight, despite the current easing of prices, and any renewed oil price hikes will worsen the inflation prospects in the EU," it said.
Secondary inflation is what the ECB is keen to prevent and the bank raised interest rates in July by 25 basis points to 4.25 percent despite signs of slowing growth to drive home its point.
The Commission does not see the euro zone economy falling into a technical recession, defined as two consecutive quarters of negative growth, as it forecast stagnation rather than contraction of quarterly growth in the third quarter after a 0.2 percent contraction in the second.
However, the International Monetary Fund also believes a recession is possible in Germany this year and has revised down its 2009 growth forecast to less than 1 percent from 1 percent, German newspaper Die Zeit said in its online edition.
Poland, the biggest of the 10 economies that joined the EU in 2004, would grow more slowly in the last two quarters of 2008, but its overall performance would be better than previously expected at 5.4 percent, rather than 5.3 percent, the Commission forecast.
It said despite the easing of the nominal and effective exchange rates of the euro, the common currency would remain a drag on exports because trade reacted to exchange rate adjustments with a time-lag.
The Commission said the U.S. government's rescue package for mortgage market-makers Fannie Mae and Freddie Mac was a clear warning that financial market turmoil was far from over, and that public finances in the EU would suffer more than previously expected from the economic slowdown.
"We must speed up the implementation of the road map to help restore confidence in the financial markets, and preserve the improvements in public finances so as not to increase the burden for future generations, which will already face the challenge of an ageing population," said Joaquin Almunia, Economic and Monetary Affairs Commissioner.
(Reporting by Jan Strupczewski; Editing by Ruth Pitchford)
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