European Union expects weaker growth in eurozone

Growth in the eurozone and the wider European Union will be slightly weaker this year than previously forecast, the European Commission announced Tuesday, as it warned that the economic slowdown in China and other emerging markets, geopolitical tensions and uncertainty ahead of the U.K. referendum on EU membership could weigh on the economy.

The EU’s economists also cautioned that the strength of factors that have been supporting growth in the region, such as low oil prices and a weaker euro, could start to fade, while fundamental problems in many of the bloc’s economies, including high levels of private debt and unemployment, continue to hold back the economic recovery.

According to the forecasts by the European Commission, the EU’s executive arm, the economy of the 19-country eurozone is expected to grow 1.6% this year. This is slightly below the 1.7% expansion the commission had forecast in February, and the 1.7% it expanded in 2015.

In 2017, the eurozone economy will expand by 1.8%, the commission said, slightly lower than earlier predictions which saw it growing 1.9%.

Growth in the 28-country EU is seen at 1.8% this year, down slightly from the commission’s February forecast and lower than the 2% it recorded in 2015. The EU’s economic output will likely expand 1.9% next year, also below the 2.0% forecast earlier this year.

The new, slightly lower forecasts highlight how Europe’s scars from the financial crisis, and the debt crisis that followed, continue to dampen its recovery.

In its forecasts, the commission said that while cheaper oil and easy monetary policy by the European Central Bank have boosted consumption and exports, the pace of growth across the 28-country bloc and the euro area remains relatively moderate.

A drop in oil prices has left more money for European consumers to spend, while the ECB’s purchases of billions of euros in assets have helped by weakening the euro against other currencies, bolstering eurozone exports.

Still, the commission cautioned that both external and internal risk factors could further curb growth in the coming years. On the external side, a slowdown in emerging markets– especially in China—could trigger significant spillovers in Europe and the world, the commission said, adding that weaker growth in a number of advanced economies, such as the U.S. and Japan, is further clouding the global outlook.

“Growth in Europe is holding up despite a more difficult global environment,” said Pierre Moscovici, the EU commissioner for economic and financial affairs.

“The recovery in the euro area remains uneven, both between Member States and between the weakest and the strongest in society. That is unacceptable and requires determined action from governments, both individually and collectively,” he added.

The commission also warned of downside risks to growth stemming from uncertainty linked to heightened geopolitical tensions and uncertainty surrounding the U.K.’s referendum on its EU membership, set for June 23.

Another factor that continues to weigh on sentiment, especially in the eurozone, is persistently low inflation. Consumer prices have remained low, despite efforts by the ECB to lift inflation in the currency bloc.

The commission now expects the rate of inflation in the eurozone to be just 0.2% this year, down from the 0.5% previously forecast. In 2017, inflation in the currency union is now seen at 1.4%, down from the 1.5% predicted earlier and still below the close-to-2% targeted by the ECB.

In the EU, consumer prices are expected to grow 0.3% this year and 1.5% next year, both lower than in previous forecasts.

Despite the weaker growth and inflation forecasts, 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 10.3% this year, from 10.9% last year, before falling to 9.9% in 2017, with the forecasts being slightly improved since February.

In the EU, the rate of unemployment is now expected to fall to 8.9% this year, from 9.4% in 2015. In 2017, EU unemployment should fall to 8.5%, the commission said.

The EU’s official forecasts, which come out three times a year, serve as the foundation for budget negotiations between EU authorities in Brussels and the bloc’s governments. The EU introduced new and stricter fiscal rules in 2013 to prevent a repeat of the sovereign-debt crisis. They allow Brussels to review budgets before they are submitted to national parliaments and to ask for changes in their spending plans.

Source: MarketWatch