EU trims growth forecast

Eurozone growth forecasts have been cut from two per cent to 1.6 per cent in 2005 following an economic slowdown in late 2004.

A Brussels spring economic forecast brings EU predictions into line with IMF and ECB outlooks – both of 1.6 per cent.

Growth in wider Europe outside the eurozone is stronger, forecast at two per cent, buoyed by expanding economies in the new EU, the UK, Sweden and Denmark.

On the bright side, the European Commission suggests “the EU is expected to return to potential during the course of 2005 as domestic demand gathers momentum”.

Growth in the eurozone in 2004 took place at “a robust” two per cent - 2.4 per cent in the wider EU25 – but the strength Europe’s recovery was hit by a number of factors.

“Soaring oil prices and the strength of the euro dampened economic activity in the euro area in the second half of 2004 with carry over effects in the beginning of 2005,” said the commission.

Many of the risks that hit Europe’s economy in 2004 are still present – as is the need for the EU to make good on structural economic reforms.

“The commission sees a number of downside risks to its spring forecasts, including further oil price hikes, disorderly exchange rate adjustments and more subdued consumer confidence,” said a statement.

“The risks to the outlook for the EU economy are tilted to the downside.”

Despite the gloom, European Commissioner for Economic and Monetary Affairs Joaquin Almunia remained upbeat into 2006.

“The second half of 2004 was a very bad period, very low growth rate, so the carryover for 2005 was not strong,” he told a press conference.

“We are estimating recovery along the year and at the end of 2005 we are expecting a growth rate according to the potential growth around two per cent.”

Employment growth is expected to accelerate to 0.7 per cent in 2005 and 0.8 per cent in 2006 – up on an estimated 0.5 per cent in 2004.

The trend is set to create three million new jobs in the EU during 2005-2006 but “leading only to a modest decline in unemployment to 8.7 per cent in 2006”.

Europe’s eurozone capitals are forecast to keep public spending down to 2.6 per cent of GDP in 2005 – trimming budgets by 0.1 per cent on 2004.

But the commission notes nine budget breakers of the euro’s rule limiting public spending to three per cent of GDP.

“Averages hide sizeable differences across the EU, with nine countries above the three per cent reference value in 2004,” said the commission.

“Of these nine, five are expected to narrow their deficits significantly this year…. by more than half a percentage point of GDP.”

Alumunia forecast that Germany, Greece, Italy, and Portugal might be heading for a breach on the three per cent ceiling.

France, a persistent offender, is not expected to exceed the limit for the first time in four years.

The commission warned Greece, Portugal and Italy that action might be taken to rein in budget deficits.

Aluminia described a forecast of a Rome budget deficit of 3.6 per cent in 2005 as “a very worrying situation”.

“The public finance situation in Italy is a difficult one. We will need to adopt measures,” he said.

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