EU Cuts Growth Forecast for 2016, Highlights Risks - 2nd Update
February 04 2016 - 8:09AM
Dow Jones News
By Gabriele Steinhauser
BRUSSELS--Growth in the eurozone and the wider European Union
will be slightly weaker this year than previously forecast, the
European Commission said Thursday, warning that the economic
slowdown in China and other emerging markets, as well as failure to
deal with the refugee and migration crisis, could further hurt the
economy.
The economy of the 19-country eurozone is expected to grow 1.7%
this year. While that is a slight improvement from the 1.6% growth
in 2015, it is somewhat lower than the 1.8% expansion the
commission had forecast in November. In 2017, the eurozone economy
will now likely expand 1.9%, the commission said, in line with
earlier predictions.
Growth in the 28-country EU is expected stay at 1.9% this year,
in line with in 2015, but down slightly from the commission's
November forecast. The commission sees the EU economic output
expanding 2% next year, also slightly below the 2.1% forecast
earlier.
The new forecasts highlight how the EU continues to struggle in
its recovery from the 2008 financial crisis and the debt crisis
that followed--despite conditions such as falling oil prices, lower
government funding costs and the relatively low value of the euro
that usually help economic growth.
"The recovery is slow, both in historical perspective and
compared to other advanced economies," the commission said.
One factor that continues to weigh on sentiment, especially in
the eurozone, is persistently low inflation--despite efforts by the
European Central Bank to push up consumer prices through a big
asset-purchase program.
The commission now expects the rate of inflation in the eurozone
to be just 0.5% this year, down from the 1% previously forecast. In
2017, inflation in the currency union is now seen at 1.5%, down
from the 1.6% predicted earlier and still below the close-to-2%
targeted by the ECB.
In the EU, consumer prices are expected to grow 1.5% this year
and 1.6% next year.
Despite the damper on growth and inflation, the commission sees
unemployment falling slightly more than previously forecast,
although it remains elevated. The jobless rate in the eurozone is
expected to drop to 10.5% this year, from 11% last year, before
falling to 10.2% in 2017.
In the EU, the rate of unemployment is now expected to fall to
9% this year, from 9.5% in 2015. In 2017, EU unemployment should
fall to 8.7%, the commission said.
"The European economy is successfully weathering new challenges
this winter, supported by cheap oil, the euro rate and low interest
rates," said Pierre Moscovici, the EU commissioner for economic and
financial affairs. "Nonetheless, the weaker global environment
poses a risk and means we must be doubly vigilant."
While a deeper drop in oil prices is usually a boon for the EU,
which has to import most of its energy, it hurts some of its
trading partners and global commerce more generally. Throughout the
forecast, the commission highlighted risks emerging from China and
stronger-than expected market turmoil there.
"The central scenario of a 'soft landing' in China is subject to
substantial risks," the commission said.
Internal issues also continue to hamper the European economy.
The commission is once again locked in negotiations with Greece
over its spending and pension policies and failure in Spain to form
a government following a surge of antiestablishment parties risks
derailing austerity measures there. On Friday, the EU executive
will decide whether to take an unprecedented step and reject
Portugal's 2016 budget. The government in Lisbon has to reduce its
deficit by an additional EUR950 million ($1.05 billion) from the
budget plan it presented last week, according to EU officials.
The commission stayed away from putting a number on the economic
and budget impacts of the migration crisis or the threat from
terrorist attacks such as the ones that hit Paris in November. It
said that newly arrived refugees and asylum seekers have so far
boosted consumption in the main reception countries and could help
growth in the future if they can be successfully integrated.
Yet it also warned of substantial costs if governments bungle
their response and resort to breaking down the open-border Schengen
zone.
"The main risks both externally and domestically are
'political'," wrote Marco Buti, the director general of the
commission's economy department. "Leadership at the global and
European level showing that common actions are agreed and swiftly
implemented would be the most effective answer to the present
economic woes."
Also missing from the forecasts was an assessment of the
economic impact of a potential decision by the U.K. to leave the
EU. A referendum on the country's membership in the bloc could be
held as early as June and a withdrawal of the EU's second-largest
economy would deal a major blow to the union.
Mr. Moscovici said the omission was intentional. "It is not in
our forecast, because it is not on our minds," he told
reporters.
Write to Gabriele Steinhauser at
gabriele.steinhauser@wsj.com
(END) Dow Jones Newswires
February 04, 2016 07:54 ET (12:54 GMT)
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