Thursday

28th Mar 2024

Brussels predicts slow growth and higher prices in Europe

The European Commission has indicated that a negative outlook for the EU economy due to global market turbulence and the US economic slow-down is becoming a reality.

"The global situation and the outlook remain unusually uncertain. This follows from the financial turmoil still ongoing," EU economy commissioner Joaquin Almunia said on Thursday (21 February).

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In an interim forecast on the EU's economy, the commission revised down its 2008 growth expectations for the 27-member bloc to two percent, and for the 15-member eurozone to 1.8 percent - both 0.4 percentage points lower than predicted in last November.

"This slowdown in growth is in particular explained by the situation in the financial markets with increased uncertainty and tightened credit conditions, a cooling global economy - especially in the US and higher oil and commodity prices," Mr Almunia explained.

A rising but equally undesirable development is foreseen for this year's inflation in the region, as it is expected to average 2.9 percent in the EU and 2.6 percent in the euro area, up by half a percentage point compared to the autumn forecast.

Mr Almunia said: "Oil and food prices contribute to more than half of the total inflation in the euro area during the last few months," adding that the upward revision in inflation forecasts is particularly "sizeable" in the EU's seven biggest economies.

Of them, Germany, as the economic heavyweight, is facing a significantly greater economic slow-down than previously predicted, from 2.1 percent down to 1.6 percent.

Similarly, French growth figures for 2008 are expected to be 1.7 percent rather than 2.0 percent. Moreover, France's inflation rate shot up to 3.2 percent in January, the highest level in more than a decade, the EU's statistical office, Eurostat, reported on Thursday.

Despite the gloomy forecasts, Mr Almunia sought to strike an optimistic note, saying: "We are living in an environment of less growth and more inflation, but there is still growth and the inflationary pressures can be tackled and can be reduced through a good use of the tools that we have in our minds and in our hands."

He argued that price rates should already be lower towards the end of this year, while urging member states to "maintain the course of structural reforms" and sound budgetary policies, as it is "the best way to cope with the current shocks facing the global economy."

Optimistic Barroso

Commission President Jose Manuel Barroso also struck an optimistic note, saying at a Brussels conference on Thursday: "Our economic fundamentals are sound and generate confidence. We are therefore better prepared to weather the storm of the financial turmoil that the world economy is now facing."

"Unemployment is at its lowest level in 25 years. For the first time in a decade, strong increases in employment have gone hand in hand with productivity growth. Public deficits have fallen sharply. We are obviously on the right track," Mr Barroso said.

But analysts note that the current situation poses a dilemma for the European Central Bank which has kept interest rates at four percent since last June due to concerns over rising inflation, while the US Federal Reserve cut interest rates in order to boost US economic growth.

'Swiftly dial back' interest rates, ECB told

Italian central banker Piero Cipollone in his first monetary policy speech since joining the ECB's board in November, said that the bank should be ready to "swiftly dial back our restrictive monetary policy stance."

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