Europe’s economic outlook deteriorates

Europe’s economic outlook deteriorates

By Tony Barber in Brussels

Published: April 28 2008 16:48 | Last updated: April 28 2008 19:50

Europe’s outlook for economic growth and inflation deteriorated sharply on Monday as official forecasts showed the US downturn and the turmoil in world financial markets damping prospects.

In its latest six-monthly forecast, the European Commission said economic growth in the 27-nation European Union would slow to 1.8 per cent in 2009 from 2.0 per cent this year. Growth in the 15-nation eurozone would fall to 1.5 per cent from 1.7 per cent.

In its November forecasts, the Commission predicted EU growth of 2.4 per cent in 2008 and 2009 and in the eurozone 2.2 per cent and 2.1 per cent respectively.

“The financial turmoil is proving deeper, wider and longer-lasting while the downturn in the US looks set to be more pronounced and protracted than assumed in the autumn forecast,” the Commission said.

“The balance of risks for the growth outlook continues to be tilted to the downside, especially for 2009, while the risks for inflation are . . . on the upside.”

The gloomy assessment triggered an immediate response from some EU member states.

Christine Lagarde, French finance minister, expressed scepticism about the revised forecasts for France, saying the outlook for 2009 growth was “very, very pessimistic”. Paris would not revise its forecast of about 2.5 per cent.

The Commission is predicting French growth of 1.6 this year and 1.4 per cent in 2009. German growth is expected to be 1.8 per cent this year and 1.5 per cent next year while the figures for the UK will be 1.7 and 1.6 per cent respectively.

The sharpest slowdown is foreseen in Italy, with growth of 0.5 per cent this year and 0.8 per cent in 2009. Spain is forecast to grow by 2.2 and 1.8 per cent.

Brussels also forecast an EU inflation rate of 3.6 per cent this year, falling to 2.4 per cent in 2009. Eurozone inflation was forecast at 3.2 per cent this year – the highest since the euro’s launch in 1999 – and 2.2 per cent in 2009. Joaquín Almunia, economic and monetary affairs commissioner, said: “Inflation is the major problem . . . in the short term.”

But the predicted slowdown in inflation will encourage leaders critical of the European Central Bank, such as President Nicolas Sarkozy of France and Silvio Berlusconi, Italy’s prime minister-elect, to argue for what they see as an overdue interest rate cut.

Their argument will be bolstered by price data from Germany indicating that eurozone inflation fell back in April, bringing at least temporary relief to the ECB. Germany’s inflation rate dropped to 2.6 per cent this month from 3.3 per cent in March – far lower than expected – and economists predict the eurozone rate, to be published on Wednesday, could fall to 3.3 per cent.

The Commission’s forecasts suggest the slowdown is taking its toll on the budget balances of certain countries, notably France and the UK. France is forecast to have a budget deficit of 2.9 per cent of gross domestic product this year and 3 per cent in 2009 while the UK deficit is projected to be 3.3 per cent in both years.