The European Commission on Wednesday sharply raised its estimate for eurozone inflation this year and said it was concerned that expectations of steadily rising prices were becoming entrenched in the 15-nation area.
In a set of forecasts clearly influenced by the US downturn and the continuing unease in financial markets, the Commission also slashed its growth predictions for the European Union’s five largest economies.
Private-sector economists said the Commission’s forecasts were more realistic than its previous estimates, issued in November, but that they might have to be revised even lower in coming months.
“The eurozone 2008 growth projection has been cut to 1.8 per cent from 2.2 per cent, but given the evolution of leading indicators this still looks very optimistic,” said Ken Wattret, economist at BNP Paribas bank.
Italy, the eurozone’s slowest growing economy for the past 15 years, once again features at the bottom of the pile, with the Commission halving its growth forecast for this year to a mere 0.7 per cent.
Experts agreed that the most striking element in the new forecasts was the Commission’s prediction that annual eurozone inflation would hit 2.6 per cent this year, much higher than its earlier forecast of 2.1 per cent.
The Commission also raised its inflation estimate for the 27-nation EU to 2.9 per cent from 2.4 per cent.
“Europe clearly begins to feel the impact of the global headwinds in terms of lower growth and higher inflation,” Joaquín Almunia, the European commissioner for monetary affairs, said.
Eurozone inflation, driven by food and energy prices, touched a 14-year high last month of 3.2 per cent, stoking fears among policymakers of a dangerous spiral in which high prices provoke high wage claims, bringing even higher prices in their wake.
Mr Almunia said he was concerned by a rise in so-called “core inflation”, which excludes food and energy prices, to 2.3 per cent in December, but added: “More worryingly, inflation expectations have also increased lately.
“For example, consumer price expectations currently stand close to high levels reached in 2001 … Their levels could suggest they are no longer as well anchored as we believed earlier.”
Rising inflation expectations also pose a problem for the European Central Bank, which appreciates the case for lower interest rates, as a way to help the slowing eurozone economy, but which is loath to jeopardise its reputation for controlling inflation.
Mr Almunia stressed the Commission’s view, expressed many times since the financial market turbulence began last August, that the European economy would weather the storm because of its “sound fundamentals” – stable public finances, no huge current account deficits, relatively low unemployment and stronger international competitiveness.
However, he acknowledged more explicitly in the past that US economic developments had continued to exert a considerable influence over the outlook for Europe.
“I have always said that the EU economies were in a different situation to the US economy, not that they will be decoupled from US economic problems,” he asserted.
The Commission lowered its forecast for German growth to 1.6 per cent, from 2.1 per cent, and for French growth to 1.7 per cent, from 2.0 per cent. The UK’s growth outlook was cut to 1.7 per cent, from 2.2 per cent, and Spain’s to 2.7 per cent, from 3.0 per cent.
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