Citing the tensions in Ukraine and the Middle East, The European Commission cut its growth forecasts for the eurozone and the European Union on Tuesday. The headline figure in the Eurozone was down from an estimate of 1.2% GDP growth forecast in May when hopes of a more robust recovery were beginning to circulate. “The European Commission’s autumn forecast projects weak economic growth for the rest of this year in both the EU and the euro area,” the Commission said in a report.
Gross domestic product in the 18-nation region will rise by 0.8 percent this year and 1.1 percent in 2015, down from projections for 1.2 and 1.7 percent in May, the Brussels-based commission said today. It lowered its projections for Germany, Europe’s largest economy, and said inflation in the euro area will be even weaker than the ECB predicts.
Among the countries that fared the worst in the updated forecast where France and Italy. The French economy is predicted to grow by just 0.3% this year compared to 1.0% predicted in May. The French structural budget effort-which strips out the effects of the economic cycle from spending and revenue levels-in 2014 is now predicted to be only 0.1% of GDP compared to an effort of 0.7% calculated in the Spring.
“After a further contraction of economic output in 2014, accelerating external demand is expected to drive a fragile recovery in 2015. Inflation is set to remain low but slightly positive in 2015 fuelled by higher import prices,” the Commission said of Italy, adding that downside risks included higher real interest rates “deleveraging pressures on the corporate and public sectors, in turn weighing on investment.”
Even so, weaker-than-expected growth this year is likely to make it much harder for countries like France and Italy to achieve the bloc’s mandated targets to keep budget deficits and government debt in check. Both countries could face disciplinary action and steep fines if they fail to show that they are making enough of an effort to bring their economies in line with European budgetary rules.
Tuesday’s forecasts also form the basis for the commission’s assessment of national governments’ 2015 budgets. While the lower-than-expected growth could mean some countries get extra time to bring their deficits below the 3% of GDP allowed under EU law, they are also likely to underpin demands for new cuts in some countries, including France and Italy.