NEWS | Wednesday, 30 April 2008

EU publishes Spring Economic Forecast

Growth in the European Union is expected to ease to two per cent in 2008 and 1.8 per cent in 2009, from 2.8 per cent in 2007, according to the EU Commission’s spring economic forecast.
The moderation in growth results from the persisting turmoil in the financial markets, the marked slowdown in the United States and soaring commodity prices, all of which are taking their toll on global activity. The EU economy is holding up relatively well thanks to sound fundamentals and is expected to create three million new jobs in 2008-2009 on top of the 7.5 million in 2006-2007. But consumer price inflation is expected to surge temporarily to 3.6 per cent this year in the EU against 2.4 per cent in 2007 due to soaring energy and food prices, before coming down to an expected 2.4 per cent in 2009.
“Economic growth is moderating in the EU and Euro area and the current, imported inflationary pressures are a matter of concern. Whilst our economies have proved resilient to the external shocks so far, and we expect continued, albeit slower, job creation, we need to stick to sound macro-economic policies and carefully avoid starting an inflation spiral that would particularly affect low income families”, said Joaquín Almunia, Economic and Monetary Affairs Commissioner.
The weaker economic outlook follows from continued distress in the financial markets, a marked slowdown in the US - which the Commission expects to grow 0.9 per cent this year and 0.7 per cent in 2009 versus 2.2 per cent in 2007 – soaring commodity prices and a resulting cooling of global growth.
The Commission’s baseline scenario assumes that uncertainty about the size and location of credit losses will prevail until the end of this year, before gradually petering out during the first half of 2009. The fact that we have not seen much of an effect so far could imply either than transmission lags are longer than expected or that the resilience has improved further than we think in the EU.
Headline inflation increased significantly since autumn to reach 3.8 per cent in March, in annual terms, in the EU. This reflects a sharp increase in global energy and food prices partly cushioned by the stronger euro. In view of this, the Commission is now forecasting average inflation this year at 3.6 per cent in the EU and 3.2 per cent in the euro area. After peaking in the second quarter of 2008 in the EU, inflation is nevertheless expected to come down to lower levels to 2.4 per cent in 2009 on average.