Eurozone growth outlook worsens amid "increasing" international risks

The eurozone economy is expected to expand by only 1.7 per cent this year, the European Commission said Thursday, revising down its growth predictions amid a slowdown in China and other emerging markets.

The euro currency bloc has struggled to rev up its economic engine ever since emerging from recession in 2013. It has had to contend with high unemployment, low inflation and, more recently, a migration crisis that is straining the bloc's cash-strapped governments.

International volatility is also posing an "increasing" risk, the commission said in a new economic forecast issued Thursday, cutting its 2016 growth prediction for the 19-country eurozone by 0.1 percentage points.

"Europe's moderate growth is facing increasing headwinds, from slower growth in emerging markets such as China to weak global trade and geopolitical tensions in Europe's neighbourhood," commission Vice President Valdis Dombrovskis said.

The forecast is based on the assumption that the Asian giant will see a smooth economic slowdown, but EU Economy Commissioner Pierre Moscovici told journalists in Brussels that "a harder landing in China" poses a "substantial" risk.

He noted that the risks to the eurozone economy have in general "considerably increased" and outweigh positive factors such as low oil prices, a depreciated euro, low interest rates, improving private consumption and the economic contribution of refugees.

The risks are not just international. Any "unexpected relapse into crisis in Greece" or the collapse of the Schengen free-travel area - under pressure because of the migration crisis - would have a negative effect on the eurozone economy, Moscovici said.

"There is more work to do to strengthen investment, enhance our competitiveness in a smart way and complete the job of fixing our public finances," he noted.

"Fiscal consolidation must go on, a reduction of public debt must go on and the respect of the rules is our mantra," the commissioner added.

Portugal, however, is threatening to get off track. The commission expects its deficit to breach the EU-recommended level of 3 per cent of gross domestic product (GDP), reaching 3.4 per cent in 2016 and 3.5 per cent in 2017.

Portugal also has the third-largest public debt in the EU, which the commission now expects to reach an increased 128.5 per cent of GDP this year and 127.2 per cent next year.

But Moscovici said that the forecast does not reflect negotiations between Brussels and Lisbon in recent days, which are meant to overcome differences over Portugal's 2016 budget.

The commission is nevertheless expected Friday to call on Lisbon to tighten its economic belt.

The financial challenges faced by Portugal, which was under an international bailout until 2014, are "not insignificant," Moscovici said.

Economic heavyweights France and Spain have also struggled to get a handle on their deficits. Both will have to undertake further efforts to meet EU targets, the forecast showed.

It also warned that growth in Spain could be negatively affected by "the uncertainty surrounding the formation of the new government."

The eurozone's main worry has long been Greece, but the commission on Thursday issued more upbeat predictions on its growth, debt and deficit.

Moscovici, however, warned that "reforms and trust are the key" for its recovery.

"These upward revisions should not lead to complacency or to a loss in the momentum that has been regained these past months in pursuing a much-needed and comprehensive reform agenda," he said.

Last update: Fri, 24/06/2016 - 08:49

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