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EU upgrades growth forecasts but says reforms essential

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(Globalpost/GlobalPost)

Struggling out of the debt crisis, the EU felt confident enough Tuesday to upgrade its economic forecasts, betting a modest recovery is sustainable if member states stick to reforms.

The 18-nation eurozone will grow 1.2 percent this year and 1.8 percent in 2015, up from previous estimates in November for 1.1 percent and 1.7 percent, the European Commission said.

Similarly, the full 28-member EU will expand 1.5 percent and 2.0 percent, also both revised up by 0.1 percentage point.

"Recovery is gaining ground in Europe," said EU Economic Affairs Commissioner Olli Rehn, while warning against complacency.

"The worst of the crisis may now be behind us but this is not an invitation to be complacent as the recovery is still modest," Rehn said.

"To make the recovery stronger and create more jobs, we need to stay the course of economic reform."

The eurozone escaped a record 18-month recession in the second quarter 2013 and after "three consecutive quarters of subdued recovery, the outlook is for a moderate step-up in economic growth", the Commission said in its Winter forecasts report.

Among member states, powerhouse Germany should post growth of 1.8 percent this year, rising to 2.0 percent in 2015, slightly better than November's estimates, while struggling France will pick up slightly to 1.0 percent but is flat at 1.7 percent for next year.

Such variations "will make eurozone policymaking a difficult balancing act for some time yet", said Tom Rogers of EY Eurozone Forecast.

Twice-bailed out Greece is expected to escape six years in deep recession with growth of 0.6 percent and then 2.9 percent, while Italy will expand 0.6 percent and 1.2 percent as Spain does better with 1.0 percent and 1.7 percent.

Non-euro Britain, however, easily out-distances its eurozone peers with gains of 2.5 percent and 2.4 percent this year and next.

For comparison. the US economy is expected to grow 2.9 percent this year and 3.2 percent in 2015.

- Low inflation risks -

Noting very low inflation, the Commission said it could "entail risks" but believed there was "only a marginal probability of shocks large enough to de-anchor inflation expectations and initiate EU-wide deflation".

Inflation has fallen steadily in recent months -- it hit 0.8 percent in January, way below the European Central Bank's 2.0 percent target -- reflecting very weak consumer demand and sparking fears of deflation, when prices fall in real terms.

In deflation, consumers put off purchases to a later date when they expect them to be cheaper but this leads companies to cut investment, hitting salaries and jobs, and in turn, undercuts demand further.

The Commission said offsetting this risk, the recovery could be stronger than expected, especially if "further bold structural reforms are implemented".

Rehn said low inflation for a short period was positive as it helped consumer demand while the ECB is committed to do everything necessary to prevent it becoming a long-term problem.

The Commission put 2014 eurozone inflation at 1.0 percent, rising to 1.3 percent in 2015, compared with its previous estimates for 1.5 percent and 1.4 percent.

For unemployment, currently running at near record highs around 12 percent, it saw no change this year at 12 percent and an improvement next year to 11.7 percent, better than November's figures.

Member state finances which have suffered huge strain during the debt crisis show signs of stabilising, the Commission said.

The average annual eurozone public deficit -- the shortfall between government revenues and spending -- is expected at 2.6 percent of Gross Domestic Product this year and to improve to 2.5 percent in 2015, well below the EU 3.0 percent limit.

But that is still slightly worse than the previous estimates of 2.5 percent and 2.4 percent.

Total accumulated debt is expected to show little improvement at 95.9 percent and 95.4 percent, still way over the EU 60 percent limit.

While Germany again leads the field with a zero public deficit forecast for the two years, France falls badly short of targets agreed with the Commission to stabilise its finances at the 3.0 percent ceiling, coming in at 4.0 percent and 3.9 percent.

Greece, however, which is locked in difficult talks with its international creditors over its reform commitments and future funding needs, should return to positive territory at 1.0 percent in 2015, after a deficit of 2.2 percent this year and 13.1 percent in 2013.

The full report can be consulted at http://ec.europa.eu/economy_finance/eu/forecasts/2014_winter_forecast_en...

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http://www.globalpost.com/dispatch/news/afp/140225/eu-upgrades-growth-forecasts-says-reforms-essential