Brussels: 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 per cent this year and 1.8 per cent in 2015, up from previous estimates in November for 1.1 per cent and 1.7 per cent, the European Commission said.
Similarly, the full 28-member EU will expand 1.5 per cent and 2.0 per cent, 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 per cent this year, rising to 2.0 per cent in 2015, slightly better than November’s estimates, while struggling France will pick up slightly to 1.0 per cent but is flat at 1.7 per cent 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 per cent and then 2.9 per cent, while Italy will expand 0.6 per cent and 1.2 per cent as Spain does better with 1.0 per cent and 1.7 per cent.
Non-euro Britain, however, easily outdistances its Eurozone peers with gains of 2.5 per cent and 2.4 per cent this year and next.
For comparison. the US economy is expected to grow 2.9 per cent this year and 3.2 per cent in 2015.
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 per cent in January, way below the European Central Bank’s 2.0 per cent 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 per cent, rising to 1.3 per cent in 2015, compared with its previous estimates for 1.5 per cent and 1.4 per cent.
For unemployment, currently running at near record highs around 12 per cent, it saw no change this year at 12 per cent and an improvement next year to 11.7 per cent, 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 per cent of Gross Domestic Product this year and to improve to 2.5 per cent in 2015, well below the EU 3.0 per cent limit.
But that is still slightly worse than the previous estimates of 2.5 per cent and 2.4 per cent.
Total accumulated debt is expected to show little improvement at 95.9 per cent and 95.4 per cent, still way over the EU 60 per cent 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 per cent ceiling, coming in at 4.0 per cent and 3.9 per cent.
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 per cent in 2015, after a deficit of 2.2 per cent this year and 13.1 per cent in 2013.