EU lifts growth forecast but warns on deficits

By Pan Pylas

Associated Press

Published: Monday, Nov. 29 2010 8:11 a.m. MST

LONDON — The European Commission revised up its economic growth forecasts for the 16 countries that use the euro on Monday despite concerns over the debt crisis, but said it expects deficits in weak countries like Portugal and Spain to be higher than expected.

In its autumn forecast, the Commission said eurozone economic growth this year would likely be 1.7 percent, nearly double its spring forecast of 0.9 percent.

Growth is expected to moderate next year to 1.5 percent on the back of waning global growth and the impact of austerity measures being pursued across the eurozone. However, it is expected to pick up again in 2012 to 1.8 percent as the private sector starts to take up the slack from the public sector's retrenchment.

The slowdown next year will be most marked in Germany, Europe's biggest economy. Though growth is set to slow from this year's stunning 3.7 percent, it will remain at an above-average 2.2 percent.

France, Europe's second largest economy is expected grow by 1.6 percent this year and next.

The countries with the biggest debt difficulties will continue to underperform as their governments rein in spending and raise taxes.

Portugal —widely-considered to be the next most vulnerable eurozone economy following Greece and Ireland — is expected to fall back into recession next year, shrinking by 1 percent following 2010 growth of 1.3 percent.

Greece, which was effectively saved from bankruptcy in May by an emergency €110 billion package, is expected to shrink again next year but by less than it has in 2010. The Commission expects the Greek economy to shrink by 3 percent in 2011, less than this year's 4.2 percent contraction.

Ireland, which on Sunday was bailed out by its partners in Europe and the International Monetary Fund to the tune of €67.5 billion, is expected to grow by a below-par 0.9 percent next year following this year's 0.2 percent decline.

Olli Rehn, the commissioner in charge of economic and monetary affairs, said the recovery has taken hold but that governments need to continue to get a grip on their public finances.

"The turbulence in sovereign debt markets underlines the need for robust policy action," Rehn said.

Rehn said countries should be ready to enact further austerity measures even if growth comes in lower than expected. The Commission is forecasting budget deficits for Spain, Portugal and Ireland to be above the levels those countries have set out in their austerity programs.

Spain is a particular worry in the markets at the moment because its sheer size would make it extremely expensive for policymakers in Europe to muster the necessary bailout funds.

Rehn said the Commission expects the country's deficit to be 6.4 percent of its national income, which is above the government's target of 6 percent. He explained that the reason for the discrepancy is that the Commission expects the Spanish economy to grow by only 0.7 percent in 2011, slower than what Madrid is predicting.

Even though Rehn said the Spanish fiscal strategy is "on track," he conceded that Madrid might have to take "further measures" if growth proves to be lower than expected.

The forecasts came after the Commission said its economic sentiment indicator for the eurozone rose to 105.3 from October's 103.8, largely on the back of continuing improvements in the services and manufacturing sectors. The increase was bigger than markets' expectations for a rise to 105.

The survey will fuel hopes that the recovery in the eurozone is on a fairly sound footing despite the debt crisis following much stronger than anticipated economic growth this year.

"November's consumer survey confirmed that the sovereign debt crisis in Ireland and elsewhere is not yet standing in the way of a broader recovery in the eurozone economy but the worrying division between the core and periphery is continuing to widen," said Jonathan Loynes, chief European economist at Capital Economics.

The key to the wider eurozone recovery is that Germany continues to grow strongly and the survey will likely reinforce expectations for a rebound in exports. More significantly, the survey indicated that consumer spending is on the up as unemployment declines and wage settlements rise.

Despite the further pick-up in sentiment, the European Central Bank is expected to keep its main lending rate at a record low of 1 percent at its meeting Thursday and for many months to come, partly because higher borrowing costs are the last thing the highly indebted countries like Greece, Ireland, Portugal and Spain need right now.

The Commission also said it expects the wider 27-country EU, which includes non-euro countries like Britain and Sweden, to grow by 1.8 percent this year, moderating to 1.7 percent next and picking up to 2 percent in 2012.

Contributing: Gabriele Steinhauser

Get The Deseret News Everywhere

Subscribe

Mobile

RSS