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EU raises eurozone growth outlook, confirms deflation

[BRUSSELS] The European Union on Thursday raised this year's growth forecast for the struggling eurozone but confirmed that deflation would take hold, caused by cheap world oil prices and a weaker euro.

The slightly improved set of numbers from the European Commission, the EU's executive, predicted the economy across the 19-country eurozone would grow by 1.3 per cent in 2015 instead of 1.1 per cent forecast in November.

But consumer prices across the eurozone would fall by 0.1 per cent in 2015, the EU's winter forecast predicted, a situation that has already pushed the European Central Bank to take unprecedented action to drive up prices.

The forecast was announced as the EU grappled with a new crisis over Greece's debt.

"The fall in oil prices and the cheaper euro are providing a welcome shot in the arm for the EU economy," said Economic Affairs commissioner Pierre Moscovici in a statement.

For the first time since 2007, all of the eurozone's economies are forecast to grow, the EU said.

But the cheaper oil prices worldwide are also driving down inflation in the eurozone. In November, the commission still believed prices would rise 0.8 per cent in 2015 and the reversal is a significant one.

With decreasing prices now confirmed, the ECB last month finally decided to embark on a quantitative easing programme involving the purchase of 1.14 trillion euros (US$1.29-trillion) in sovereign bonds.

In a deflationary spiral, businesses and households delay purchases, throttling demand, triggering recession and causing companies to lay off workers.

However, the commission said the effects of low oil would taper off this year and predicted positive, but still low, inflation of 1.3 per cent in 2016.

"The impact of stronger domestic demand, the depreciation of the euro and an assumed gradual recovery in energy prices should push inflation noticeably higher," the commission said in the report.

The commission said that unemployment would fall very slightly in 2015, to 11.2 per cent. Joblessness in the single currency zone now stands at 11.4 per cent.

"There is still much hard work ahead to deliver the jobs that remain elusive for millions of Europeans," Moscovici said.