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2nd Jul 2022

Eurozone to benefit from oil price fall

  • Falling oils prices 'a welcome shot in the arm' for the eurozone (Photo: ezioman)

The eurozone economy will expand by 1.3 percent this year, the European Commission said as it unveiled its latest economic forecasts for the bloc.

Speaking on Thursday (5 February) as the Commission published its Winter Forecast, Economics commissioner Pierre Moscovici said that the falling oil price and a weaker euro would provide a “welcome shot in the arm for the EU economy".

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The commission believes that the single currency area will grow by 1.9 percent in 2016 “on the back of strengthened domestic and foreign demand”. Growth for the EU as a whole is projected to be 1.7 percent and 2.1 percent in 2015 and 2016 respectively.

Meanwhile, the EU executive confirmed that the eurozone economy grew 0.8 percent in 2014, bringing to an end two years of recession.

How accurate the predictions will prove to be is open to debate.

The commission’s economic projections for 2015 and 2016 have already been steadily revised down since last year, and the overall economic outlook is increasingly uncertain.

The commission warned about the risk of deflation, commenting that a “protracted period of very low or negative inflation would also be detrimental to the growth outlook”.

Prices across the eurozone fell by 0.6 percent in January, following a 0.2 percent drop in December, in large part by a collapse in oil prices from over $100 a barrel last July to below $50. The commission expects that prices will fall by 0.1 percent across the whole of 2015 before rising by 1.3 percent - still well below the ECB’s 2 percent target.

This, combined with the ECB’s plans to begin a €1.1 trillion bond-buying programme from March until at least September 2016 have reduced the euro’s value against the dollar by 8 percent over the past two months.

Oil price

International observers are less sanguine about the possibility of the oil price fall being a real boon for the eurozone.

The World Bank believes that consumer confidence in Europe is so weak that most of the windfall from lower energy prices will simply be saved by most households.

However all 28 EU countries are expected to have positive growth rates this year, the first time since 2006.

Ireland is expected to retain its status as the EU’s strongest economic performer with a 3.5 percent growth rate this year.

Meanwhile, Italy and Cyprus are forecast to have the weakest economic performance, expanding by 0.4 percent and 0.6 percent respectively.

Elsewhere, EU governments will move closer towards balanced budgets, with average deficit levels set to fall to 2.6 percent this year from 3.0 percent in 2014 and to 2.2 percent in 2016. Debt burdens in the euro area will peak this year at 94.4 percent.

Moscovici, a former French finance minister, singled out his country for criticism over its attempts to bring its deficit down to the EU’s 3 percent limit.

The package of reforms presented by his successor Michel Sapin would amount to a 0.3 percent reduction to France’s structural deficit of GDP, below the 0.5 percent minimum required by EU rules if Paris is to avoid sanctions in March.

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