European commission cuts 2015 growth forecast

UK expected to grow 2.7% and 2.5% in next two years but questions remain about impact of further falls in prices across eurozone

The European commission has insisted the risk of deflation in the eurozone is very low, even as officials cut forecasts for rises in prices and trimmed expectations for economic growth next year.

Launching its spring 2014 forecasts, the commission outlined UK growth predictions that Howard Archer, chief UK And European economist at IHS Global Insight, said would make it the "strongest expanding major west European economy in both years".

The eurozone is forecast to grow by 1.2% this year, the commission said, revising its 2015 forecast down by 0.1 percentage point to 1.7%. The UK forecasts were for 2.7% and 2.5%, respectively.

But as Siim Kallas, the European commission's vice-president, declared that "the recovery has now taken hold" across the EU, questions were being raised about the impact of further falls in prices across the eurozone.

The commission's inflation predictions expect prices in 2014 to rise even more slowly – by 0.8%, compared with 1% three months ago. Price growth was 1.3% in 2013, well below the 2% desired by the European Central Bank.

The forecasts were released before the ECB's meeting on 8 May. Economists polled by Reuters are not expecting the central bank to change its policies toward economies growing more slowly than those outside the eurozone.

Despite cutting its predictions for inflation, the commission said the probability of deflation was very low.

Archer said: "While the ECB currently regards the risk of generalised deflation across the eurozone as limited and sees no evidence that consumers are delaying purchases in anticipation of falling prices, the bank is seriously concerned that prolonged very low inflation will destabilise medium-term inflation expectations, thereby making it harder and longer to get consumer price inflation back to its target rate of 'close to, but just below 2.0%'."

The EU came out of recession a year ago, but Kallas said more structural reforms were needed for the recovery to remain in place after Greece, Ireland, Portugal and Cyprus needed bailouts.

"The recovery is gaining traction, Kallas was quoted as saying. "Importantly, the employment situation has started improving."

Eurozone unemployment was 12% last year. The commission is forecasting a drop to 11.8%, despite previously expecting unemployment to remain at 12%.

The UK has been growing faster than the EU average. Despite this, Larry Summers, the former US Treasury secretary, criticised the coalition government's austerity measures and its Help to Buy programme for the housing market.

"The stated goal of the austerity drive was to improve Britain's confidence as a sovereign borrower," Summers wrote in the Financial Times. "Yet there is a basic fact that guaranteeing mortgages en masse is creating a huge potential government liability, as do other loan guarantee programmes."


Jill Treanor

The GuardianTramp

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