EU cuts euro zone growth forecast, inflation to slow

February 7, 2019

By Francesco Guarascio

BRUSSELS (Reuters) – The European Commission sharply cut on Thursday its forecasts for economic growth in the euro zone this year and next because of an expected slowdown in the largest countries of the bloc caused by global trade tensions and growing public debt.

In its quarterly economic forecasts, the EU executive also revised down its estimates for the inflation in the 19-country currency bloc next year, which now is expected to be lower than forecast by the European Central Bank – likely complicating the bank’s plans for an interest rate hike this year.

The Commission said euro zone growth will slow to 1.3 percent this year from 1.9 percent in 2018, and is expected to rebound in 2020 to 1.6 percent.

The new estimates are less optimistic than the Commission’s previous forecasts, released in November, when Brussels expected the euro zone to grow 1.9 percent this year and 1.7 percent in 2020.

Growth in the 27-nation European Union – without Britain which is planning to leave in March – is expected to slow to 1.5 percent this year from 2.1 percent in 2018. Next year, the bloc is forecast to expand by 1.8 percent.

All countries of the European Union are poised to continue growing, with the bloc expected to post its seventh consecutive year of expansion, but the larger member states will brake significantly.

In Germany, the bloc’s largest economy, growth is expected to slow to 1.1 percent this year from 1.5 percent in 2018. The Commission had previously forecast 1.8 percent growth for Germany this year.

France, Italy, Spain and the Netherlands are also forecast to reduce the pace of their expansion, with Italy expected to be the slowest economy in the whole EU with a mere 0.2 percent growth this year.

The Commission cited global trade tensions and China’s slowdown as the main drags for the European Union’s economy.

But it also mentioned renewed concerns on debt sustainability, mostly in Italy, as a cause for the slowdown as Rome passed a free-spending budget forecast to have limited effects on growth.

The economic slowdown forecast by the Commission is worse than that seen by the ECB in its latest projections released in December, when the bank expected the euro zone to grow by 1.7 percent this year.

In a further concern for the ECB, the Commission expects euro zone inflation to be at 1.4 percent this year, below ECB estimates of 1.6 percent rate, and further away from the bank’s target of a rate close to 2.0 percent.

After December, ECB policymakers have said that the bank’s new forecasts in March are likely to be revised down.

(Reporting by Francesco Guarascio in Brussels; additional reporting by Balazs Koranyi in Frankfurt; editing by Philip Blenkinsop)

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