MercoPress. South Atlantic News Agency

Euro zone forecast: less growth and higher inflation

Economic growth across the Euro zone will be lower in 2008 than estimated, while inflation will stay high, the European Commission has said. Brussels expects growth of 1.8% this year in the 15-nation Euro zone which is lower than its November estimate of 2.2%, and below the growth rate of 2.7% recorded in 2007.

The Commission said credit market turmoil, slower US growth and surging oil prices would weigh on growth, while inflation would rise to 2.6%. "Europe clearly begins to feel the impact of the global headwinds in terms of lower growth and higher inflation" said Joaquin Almunia, economic and monetary affairs commissioner. But "Europe's increased resilience, thanks to the reforms already carried out, together with sound fundamentals, do help weather the storm" he added. However he denied that the Euro zone was heading into a period of stagflation, a term used to describe an economic environment of negative growth and rising prices. Almunia said he does not see the need for a stimulus package in Europe. "I do not see, in general terms, the need for additional fiscal input" he said, reiterating his comments at the EU finance ministers' meeting earlier this month. Some analysts, considering that the downgrade still veered on the optimistic side, expected further downward revisions. "We expect a sharper slowdown to 1.3%," said Sunil Kapadia, an economist at UBS. The Commission said that the deceleration in growth could be short-lived if the US picked up later in the year and lending costs and conditions eased. At the same time, it expected consumer inflation to fall back to just above 2% - the European Central Bank's target rate - by the end of 2008. But Mr Almunia warned that while the risks to the inflation outlook now appeared more balanced, they were still "on the upside". He added: "The increase in inflation expectations [is] a particular source of concern." The comments underscore the challenges faced by the European Central Bank, which faces the twin threats of rising inflation and a slowing economy. By country the growth down turn is as follows: Germany to 1.6% from 2.1%; France to 1.7 from 2%. It halved its projection for Italy to 0.7% from 1.4% and Spain down to 2.7% from 3%. Outside the Euro zone, the EC reduced its UK growth forecast to 1.7% from 2.2% and cut Poland to 5.3% from 5.6%. In terms of oil prices, the commission sees them remaining "high and volatile, driven by limited spare capacity and geopolitical tensions in oil-producing countries". It assumes them averaging 90 US dollar per barrel over 2008 as a whole, but added that the impact is "partly cushioned" by the appreciation of the Euro. Looking further ahead, "this updated outlook for 2008 points to a reduced growth momentum at the turn of 2009", the commission said, citing the impact of the lower carry-over from 2008, the more pronounced and protracted slowdown in the US and the re-pricing of risks as factors.