Eurozone ups growth forecast, sees Middle East inflation threat
Olli Rehn - Photo EC
(BRUSSELS) - The European Commission raised its eurozone growth forecast to 1.6 percent for 2011 on Tuesday, but warned that markets remain fragile and unrest in the Arab world threatens to drive up inflation.
The European Union's executive arm, which last November had forecast 2011 growth of 1.5 percent, said the improved outlook was supported by "better prospects for the global economy and upbeat EU business sentiment."
But the recovery is expected to remain uneven among the 17 nations that share the euro, with the export-driven German economy leading the pack while debt-stricken southern countries lag behind as they slash spending.
"While exports should continue supporting the recovery, a rebalancing of growth towards domestic demand is expected for 2011, resulting in more sustainable growth," said EU economic affairs commissioner Olli Rehn.
"However, the recovery remains uneven and many member states are going through a difficult phase of adjustment," he said after the commission released an interim forecast based on data from the EU's seven biggest economies.
Growth in 2011 will be slightly lower than last year. The eurozone economy expanded by 1.7 percent in 2010 after the global financial crisis caused it to shrink by a record 4.1 percent in 2009.
The commission also raised its growth forecast for the 27-nation EU, which includes Britain and Poland, by 0.1 percentage points to 1.8 percent.
Estimates were lifted for Europe's economic powerhouses.
The German economy is expected to expand by 2.4 percent against a previous estimate of 2.2 percent while France will see growth of 1.7 percent instead of 1.6 percent, according to the new forecasts. Britain will record 2.0 percent growth, slightly lower than previously estimated.
By comparison, Mediterranean countries saddled by high deficits and debt will see meagre growth: 1.1 percent in Italy and 0.8 percent in Spain.
The eurozone recovery has not translated into a drop in unemployment, with official data released Tuesday showing a marginal fall in the jobless rate to 9.9 percent in January, after being stuck at 10 percent for several months.
Financial markets are recovering from the eurozone debt crisis, which triggered Greek and Irish bailouts last year, but the overall situation remains "relatively fragile," the commission said, amid fears Portugal could need a rescue.
The borrowing costs of nations with high public deficits have stayed at elevated levels, while "important vulnerabilities" remain in the sustainability of public finances in some states and the funding of private banks.
The commission also hiked its 2011 inflation forecast for the eurozone from 1.8 percent to 2.2 percent, above the European Central Bank's 2.0 percent threshold for price stability.
"To a large extent this can be attributed to the surge in commodity prices towards the end of the year," the EU executive said in its report.
Inflation continued to creep up in February, reaching 2.4 percent on an annual comparison, the Eurostat data agency said, as economists speculate that the ECB will raise interest rates sooner or later to tame rising prices.
Inflation will peak in the first quarter of 2011 before gradually falling back towards 2.0 percent by the end of the year, the commission forecast.
At the same time, inflation "may prove to be volatile in the course of 2011" amid turmoil in oil-producing nations in the Arab world.
"Should geopolitical tensions spread further in the MENA (Middle East-North Africa) region, disruptions to oil supply could not be excluded, fuelling oil-price increases beyond what is assumed in this forecast," it said.
Marie Diron, senior economic adviser at Ernst & Young, said the commission painted a "benign" picture of the eurozone economy, warning policymakers to brace for "much less favourable developments than currently envisaged."