Economy & Finance

Euro zone economy turns corner, but growth, inflation subdued: EU executive

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BRUSSELS (Reuters) – The euro zone economy will expand slightly more slowly next year than previously expected because of weaker private demand and investment and inflation will stay well below the central bank target over the next two years.

The European Commission forecasts published on Tuesday are likely to add to arguments for an interest rate cut by the European Central Bank, which is to discuss its next policy move on Thursday.

The European Union executive arm said in a regular forecast that the economy of the 18 countries that will share the euro from next year will expand 1.1 percent in 2014 after a 0.4 percent contraction this year. In 2015, the euro zone is to accelerate to growth of 1.7 percent.

In May, the Commission forecast that the euro zone would grow 1.2 percent in 2014, but it then made more optimistic assumptions on private consumption and investment, even though assumptions of government demand remained unchanged.

Nevertheless, recession was firmly behind the euro zone from the second quarter of this year and the pace of recovery would slowly accelerate quarter-on-quarter.

“There are increasing signs that the European economy has reached a turning point,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.

“The fiscal consolidation and structural reforms undertaken in Europe have created the basis for recovery,” he said.

Many euro zone governments were forced to sharply rein in spending over the last three years as investors began demanding unsustainably high prices for lending to them because of concern they might never get paid back.

The tight fiscal policy was one of the main factors behind the two-year euro zone recession, but it helped win back some investor confidence.

The Commission forecast the euro zone’s aggregated budget deficit would shrink to 2.5 percent of gross domestic product in 2014 and 2.4 percent in 2015 from 3.1 percent this year, as consolidation now continues at a slower pace to help growth.

Public debt will peak at 95.9 percent of GDP next year, up from 95.5 percent this year and then fall to 95.4 percent in 2015, the Commission said.

The Commission said that euro zone consumer price growth, which the ECB wants to keep below, but close to 2 percent over a two year horizon, will be 1.5 percent this year and next and only 1.4 percent in 2015 as unemployment stays at record high levels around 12 percent.

But euro money market traders polled by Reuters said the ECB might want to wait for more data before deciding to cut rates to a new record low and did not expect a change to the main refinancing rate this week.

(Reporting By Jan Strupczewski- Editing by Martin Santa)

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