European Commission cuts eurozone growth forecast

The eurozone economy is expected to shrink 0.4 per cent this year and grow 1.2 per cent next year, down from the February prediction of a 0.3 per cent contraction in 2013 and 1.4 per cent growth in 2014, according to European Commission's latest forecast released yesterday.

In the 27-nation European Union, the gross domestic product (GDP) is forecast to shrink 0.1 per cent this year before moving up to a 1.4 per cent growth trajectory in 2014. The new projections are broadly in line with the economic forecasts of the European Central Bank.

Four of the largest five eurozone economies will remain in recession this year which include France, Italy, Spain, and the Netherlands, the EC said.

Germany, the bloc's largest economy is projected to grow 0.4 per cent in 2013 and 1.8 per cent next year, while France, the second-largest, is expected to register 0.1 per cent contraction this year and 1.1 per cent expansion next year.

The UK is expected to post a GDP growth of 0.6 per cent in 2013 and 1.7 per cent in 2014.

According to the commission, the EU economy is expected to stabilise in the first half of the current year, and is projected to turn positive gradually in the second half.

External demand is expected to drive economic growth this year. Private consumption and investment are likely to make way for a modest domestically sustained recovery next year, the EC said.

EC vice-president for economic and monetary affairs Olli Rehn said: "In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe.''

''The EU's policy mix is focused on sustainable growth and job creation. Fiscal consolidation is continuing, but its pace is slowing down. In parallel, structural reforms must be intensified to unlock growth in Europe."

While the financial market situation has improved significantly and for the EU as whole interest rates have declined, this has not yet fed the real economy, and businesses in vulnerable economies continue to face tight credit conditions.

The weak labour market is expected to weigh on private consumption. Unemployment is forecast to reach 11 per cent in the EU and 12 per cent in the eurozone in 2013 and to stabilise at these levels in 2014, while differences across member states are expected to remain very large.

Jobless rates in struggling Greece and Spain are expected to reach 27 per cent followed by Portugal with 18.2 per cent, Cyprus 15.5 per cent and Slovakia 14.5 per cent this year.

On the other hand, Austria and Germany will have the lowest rates of 4.7 per cent and 5.4 per cent respectively, followed by Luxembourg, Malta and Netherlands with 5.5, 6.3 and 6.9 per cent respectively.

Unemployment rate in the UK is likely to be around 8 per cent this year and the next year.

Inflation is expected to decline gradually in 2013, and is now projected at 1.8 per cent in the EU and 1.6 per cent in the euro area and stabilising at 1.7 per cent and 1.5 per cent respectively next year.

Fiscal deficits are projected to fall to 3.4 per cent in the EU and 2.9 per cent in the eurozone in 2013.

Several nations will have government deficits above the ECB limit of 3 per cent which include Ireland with 7.5 per cent, Spain and Cyprus with 6.5 per cent, Portugal 5.5 per cent, Slovenia 5.3 per cent, France 3.9 per cent, Greece 3.8 per cent, Malta 3.7 per cent and the Netherlands 3.6 per cent.

The UK is expected to post a 6.8 per cent deficit in 2013 and Poland 3.9 per cent.

EC said that France and Spain would get for two more years to meet its deficit target, while Netherlands, Slovenia and Poland are likely to get a year more to bring their deficits down to below 3 per cent.

In light of the weak outlook for economic activity, debt-to-GDP ratios are forecast to reach 89.8 per cent this year in the EU and 95.5 per cent in the euro area.

Greece will have the highest debt of 175 per cent of GDP followed by Italy with 131 per cent, Ireland and Portugal with 123 per cent and Cyprus with 110 per cent.