The European Commission lowered its own forecast for the growth rates in 2008 of the economies of 15 countries of the eurozone and the European Union as a whole.
Economic growth in the countries of the European Union is slowing sharply due to a long crisis and financial market uncertainty and a weakening American economy, the European Commission said on Thursday, February 21. The central executive body of the EU expects that the economic growth of a bloc of 27 countries will amount to 2% this year, i.e. revised the numbers down compared to their own forecast of 2.4%, published in November 2007. It is expected that the economy of 15 countries in the euro area this year will grow by 1.8%, not 2.2% as the commission predicted in November. In recent months, the commission has warned that this year the growth of the economies of the EU, including those in the eurozone, will slow down. However, the latest revision of the forecast shows that the pessimistic scenario has now become a reality, the newspaper writes. The Commission noted that its current forecast could be revised downward. “Crisis in the financial sector continues, and there is a sharp slowdown in the United States at high commodity prices,” the commission said in a statement. According to the European Commission, this year inflation in the eurozone will average 2.6%, which is significantly more than the November forecast (2.1%). The commission named higher prices for food and energy as grounds for a worsening forecast.
Rising inflation coupled with a slowdown in economic growth presents a difficult dilemma for the European Central Bank. The bank has kept the base rate at 4% since last June, citing the danger of inflation. The US Federal Reserve, by contrast, lowered interest rates to counter a potential recession.
“Europe is beginning to feel the effects of global headwinds, and this translates into lower growth and higher inflation,” said Joaquin Almunia, EU Commissioner for Economic Affairs and Monetary Policy. Almunia urged governments to cut debt and “open” labor markets to help the economy withstand global shocks. According to the EU forecast, global economic growth this year will slow down and will be below 4%, while oil prices remain “high and volatile” due to bottlenecks, which are oil refining and the tense political situation in producing countries. Banks are still suffering from the American mortgage crisis, because of which they are much more reluctant to provide loans.
The EU preliminary forecast is based on an analysis of the seven largest European economies: Germany, Britain, France, Italy, Spain, the Netherlands and Poland, a more complete forecast is due in April. The strong growth of German exports in recent years has contributed to the appreciation of the euro and stimulated the economy of the EU countries, but this growth will slow down to 1.6% in 2008, since a strong euro dampens exports compared to the US dollar and Asian currencies, the newspaper writes. . The EU warned that Germany’s efforts to reduce unemployment could be undermined by rising inflation and low consumer confidence – people prefer to save rather than spend. According to EU forecasts, economic growth in the UK will fall to 1.7% amid falling housing prices, it will be more difficult to get loans. Increased uncertainty is also likely to drive the British to save, although a weakening pound should help export from the country, making it cheaper for foreign buyers. According to the analysis, France’s economy is likely to grow by a modest 1.7% this year, and maybe even less if the country is more seriously affected by the global economic slowdown and if President Nicolas Sarkozy fails in his attempts to stimulate consumption by price limits. Spain’s economic growth this year will slow to 2.7% as the housing price bubble “blows off” and consumers “tighten their belts,” but inflation should decline.
The decline in GDP growth was due primarily to the turbulent situation in the financial markets, which lasted longer than expected, said Joaquin Almunia, EU Commissioner for Economics and Monetary Policy, at a press conference. He added that a similar situation existed in the United States, where the real decline in GDP growth was also underestimated – especially given the high prices of raw materials (primarily oil), which complicated and aggravated the situation. Almunia noted that “we are not in a stagflation situation – we are talking about reducing GDP growth and increasing inflation.”
According to forecasts, the inflation rate this year will average 2.6%, primarily due to high prices for food and energy. However, the European Commission expects, said Joaquin Almunia, that by the end of the year, when the prices of these products are gradually “cooled”, inflation will return to its target value (slightly below 2%).
Economists believe that despite the high level of inflation in the eurozone (in January it reached a record high of 3.2%), we should expect a decrease in the ECB rate in the second quarter. By the end of the year, the rate is expected to be 3.5% (now 4.0%).