EU downgrades euro zone growth forecast
Confidence in Europe’s recovery is waning following the European Commission’s downward revision for growth in 2014.
The EC on Tuesday morning estimated that the 17-country euro zone will expand by only 1.1 per cent next year, after two years of recession. While the downgrade is relatively minor – its previous forecast called for 1.2 per cent growth – the new number represents the second negative revision this year. At the start of the year, the EC had estimated 2014 growth at 1.4 per cent, a figure that would probably have been strong enough to prevent unemployment from getting worse.
The euro zone contraction forecast for 2013 was left unchanged, at 0.4 per cent, following a 0.7 per cent contraction in 0.7 per cent in 2013.In a statement, Olli Rehn, the EC’s economics commissioner, said “There are increasing signs that the European economy has reached a turning point. But it is too early to declare victory: unemployment remains at unacceptably high levels. That’s why we must continue to modernize the European economy.”
Double-digit unemployment, the austerity programs designed to bring down budget deficits and overall sovereign debt and the rising euro – it’s up about 5 per cent against the dollar over four months – appear to be dampening the growth outlook. Some economists think decelerating credit growth, or negative credit growth in some countries, is also removing growth momentum.
In a note published ahead of the euro zone growth forecasts, Société Générale said it remained pessimistic about the pace of the European recovery. It cited “financial fragmentation, the slowdown in the pace of structural reforms, and a likely return of fiscal austerity because of the minimal progress made in the deleveraging process” for its less than bullish outlook.
The euro zone countries to get hit with the biggest growth downgrade were France, the region’s second largest economy, and Spain, the fourth largest. France is now expected to grow by just 0.9 per cent in 2014, down from the previous estimate of 1.1 per cent. Spain is forecast to expand by 0.5 per cent against 0.9 per cent.
Even German growth is slowing as its European trading partners go from trot to slow walk. Its growth is forecast at 1.7 per cent next year, down from the spring forecast of 1.8 per cent.
Greece was the one bright spot among the EC’s new numbers. After six years of grinding recession, it should grow by 0.6 per cent next year and a strong 2.9 per cent in 2015. Portugal is also emerging from a recession that saw its economy shrink in four of the last five years.
The slower growth forecasts is bad news for employment growth. Economists generally think that growth of about 2 per cent is required to significant numbers of jobs, though the figure would vary country by country. The euro zone’s unemployment rate will be a predicted 12.2 per cent 2014, is at its highest level since the currency was launched in 1999. Earlier this year, the forecast was for 12.1 per cent unemployment. Youth unemployment is 40 per cent in Italy and more than 50 per cent in Spain and Greece.
The rising unemployment, falling inflation rates and slowing growth may tempt the European Central Bank to drop interest rates. Its next rate setting meeting is set for Thursday.
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