Eurozone growth forecast cut on China, migrant risks
Photo © benjaminnolte - Fotolia
(BRUSSELS) - The EU cut Thursday its eurozone growth forecasts for this year, warning that the slowdown in China and Europe's biggest migrant crisis since World War II could chill the economy.
Warning of increased global risks for the 19-country single currency area, which is still recovering only sluggishly from its debt crisis, the European Commission trimmed its 2016 forecast to 1.7 percent from 1.8 percent.
"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," EU vice president Valdis Dombrovskis said.
Brussels warned in its winter economic forecast that further reintroduction of border controls in the Schengen passport-free area as Europe struggles to curb the huge flow of refugees and migrants would cause further disruption.
The migration crisis, which saw more than one million people brave risky sea crossings to reach the continent last year, posed "major political challenges" which could easily undercut growth if not properly handled, the Commission said.
"A more widespread suspension of Schengen and measures that endanger the achievements of the internal market could potentially have a disruptive impact on economic growth," it said.
The EU has warned of a possible two-year reintroduction of border controls in the 26-country Schengen area -- effectively suspending free movement across the zone -- over Greece's failure to secure its borders against the massive inflows of migrants.
Greece nearly crashed out of the euro last year because of debt but the Commission said it did not predict a relapse this year.
- 'Surrounded by risks' -
The Commission said lower oil prices, cheap money and a weak euro which boosts exports were all positives but they may not be enough to keep the economy on track.
Falling prices may even be a hindrance since buyers put off purchases if they think they can get them cheaper later, and the forecasts put the eurozone perilously close to this deflation trap.
The Commission said there was zero inflation in 2015, coming in below even its forecast for a marginal gain of 0.1 percent.
Worse still, it slashed its inflation estimate for this year to 0.5 percent from 1.0 percent, before it picks up to 1.5 percent in 2017.
The European Central Bank's inflation target is around 2.0 percent, highlighting the scale of the problem, and it has launched a more than one-trillion-euro stimulus programme to bolster growth.
So far, progress has been minimal and ECB head Mario Draghi has said he will look at doing even more if the figures do not improve.
EU Economic Affairs Commissioner Pierre Moscovici said the bloc had to be "doubly vigilant" in light of the growing challenges.
"It's a forecast surrounded by risks," he said.
- France, Spain, Portugal deficits -
France, Spain and Portugal were all still on course to break the EU's budget deficit rules, according to the Commission.
The crisis forced governments to borrow heavily, running up large budget deficits as they tried to keep their economies afloat in the worst slowdown since the 1930s Great Depression.
The modest recovery has helped, with budget deficits -- the shortfall between revenues and spending -- back within the EU ceiling of three percent of annual economic output.
The Commission said the average eurozone budget deficit last year was 2.2 percent of gross domestic product (GDP) and should improve further to 1.9 percent this year and 1.6 percent in 2017.
France however will continue in breach of EU norms, at 3.7 percent last year, 3.4 percent in 2016 and 3.2 percent in 2017, having repeatedly been given more time to balance its books.
The impact of the crisis is most clearly seen in the total accumulated debt figures, with nearly all EU member states breaching the 60 percent of GDP limit by a very large margin.
The eurozone debt average was 93.5 percent last year and will improve only modestly to 92.7 percent and 91.3 percent this year and next.
Winter 2016 Economic Forecast: Weathering new challenges