EU cuts growth estimates, sounds gloomy note on the economy

22 February 2008

Brussels – The European Commission warned of difficult times Thursday as it raised its inflation estimates by half a percentage point and cut growth forecasts by nearly the same amount.

"We are living in a difficult moment," said Joaquin Almunia, the European Union’s economic and monetary affairs commissioner.

"Europe clearly begins to feel the impact of the global headwinds in terms of lower growth and higher inflation," he added.

The latest forecasts by the EU executive predict gross domestic product (GDP) in the 27-member bloc to grow by just 2pc in 2008. This is 0.4pc lower than predicted by its November estimate. The GDP growth estimate for the 15-member eurozone was also cut by a similar amount, from 2.2 to 1.8pc.

At the same time, 2008 inflation forecasts for both the eurozone and the EU as a whole were revised up by half a percentage point, to 2.6 and 2.9pc respectively.

Officials in Brussels said the European economy was being adversely affected by the uncertain outlook of the global economy, which was in turn suffering from the slowdown in the US economy, soaring oil and food prices and the ongoing turmoil on the financial markets.

Almunia said the revised figures were explained by the fact that all of the fears expressed by the commission in formulating its November forecasts had materialised: "The financial turmoil is taking longer than expected", "the US slowdown is more evident" while "confidence levels have not improved, they have worsened."

Growth in Europe’s economic locomotive, Germany, was revised down to 1.6pc in 2008, with high inflation denting consumer confidence.

The commission’s latest forecasts also confirmed the widely-held belief that Italy is "the sick man of Europe", with GDP growth in Europe’s fourth-largest economy now predicted to crawl at a near-flat rate of 0.7pc.

Almunia called on European consumers to be both "realistic and optimistic."

The commissioner urged governments to enact sound fiscal policies and progress with structural reforms aimed at increasing competition. He also invited trade unions not to expect wage increases that were not being backed by productivity gains.

While he ruled out the need for a fiscal stimulus package similar to the one adopted by the US, Almunia said governments with solid public accounts would be able to mitigate the impact of the economic slowdown by increasing spending.

However, this option would not be available to countries like France or Italy, whose budget deficit to GDP ratio is still dangerously close to the upper 3pc limit imposed on members of the eurozone.

"Excessive deficits are not a solution," Almunia said.