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European Commission Cuts Forecasts on Growth

by on May 5, 2014 1:01 pm BST
 

The European Commission (EC) cut its economic forecasts for the eurozone, citing that low inflation will remain a consistent problem for the next couple years. Growth domestic product is expected to rise 1.7 percent for the 18-nation bloc, opposed to the 1.8 percent originally forecasted. The EC forecasts inflation to remain under one percent for the remainder of the year before increasing to 1.2 percent in 2015, yet it will still remain lower than the European Central Bank (ECB) two percent target.

Some officials are still optimistic as growth expansion for 18-nations remain underwhelming. Marco Buti, the head of the economics department at the EC, said “the necessary competitiveness adjustment and debt reduction in vulnerable countries are more difficult to achieve with very low EU-wide inflation, in particular if it were to persist over too prolonged a period.” Because who doesn’t like to pay off debt with cheaper money? “Overall, the outlook has improved, but it remains conditional on continued credible action on several fronts at national and EU levels,” Buti added.

ECB President Mario Draghi is worried that growth stagnation will lead to structural unemployment. Unemployment in the eurozone just dipped below 12 percent to 11.8 percent in two consecutive months. The mean from 2008 to current still is over 10 percent, and the unemployment rate is forecasted to reach above historical levels. There are five countries (Greece, Spain, Portugal, Italy, and Ireland) in the top ten for unemployment, all above 11.5 percent. Long-term unemployment is 5.9 percent, down from a historical high of six percent last month.

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Public debt is expected to be on the rise. In 2008, the debt-to-GDP for the euro-bloc was 70.2 percent, but it is expected to grow to 96 percent this year. Countries that have struggled with debt throughout the crisis continue to do so, regardless of officials hopes of a wind-down. Since 2008, Spain’s debt-to-GDP has risen from 36.1 to 93.9 in 2014. Italy and Greece has seen a 29 and 75.3 percent increase in the same period, respectively. France has also seen over a 30 percentage point increase.

The two things that remains consistent in the eurozone are the mediocre growth forecasts and heavy debt burden the majority of countries bare. The prior will unlikely rise unless that latter is reduced. Draghi should be concerned this the eurozone’s structural debt problem because the forecast is not pretty.

euro-area-government-debt-to-gdp