EU slashes growth forecast, foresees inflation surge[fr][de] 

Ongoing financial turmoil, the sharp economic slowdown in the US and high prices for commodities such as energy and food were identified as the chief causes of the "unusually uncertain" global economic situation and outlook, said Economic and Monetary Affairs Commissioner Joaquín Almunia, presenting the EU executive's latest economic forecast on 20 February. 

The Commission also predicted that average inflation would soar well above the EU's 2% target, reaching 2.9% (2.6% in the euro zone) - a rise of 0.5% compared with previous estimates – before falling again towards the end of the year. 

The European Central Bank (ECB) has been trying to steady inflation by keeping its lending rates at a stable 4% over the past few months, despite the economic slowdown and interest rate cuts by the US Federal Reserve and the Bank of England (see EurActiv 24/01/08). The ECB also cautioned that inflationary pressures could worsen if trade unions continue to insist on wage rises (see EurActiv 11/01/08). 

In response, the European Trade Union Confederation (ETUC) warned that "real salaries in Europe are in a downward spiral," while "the share of wages as a proportion of national income continues to fall." It launched an EU-wide wage campaign demanding higher pay and "more purchasing power and more equality" for workers. 

The gloomy economic outlook was compounded by "fragile" conditions in the international financial system and "impaired" functioning of credit markets, the Commission said. But the updated forecast speculated that the deceleration may be "short-lived" as quarterly figures suggested growth would pick up again in the second half of the year, providing an expected upturn in the US economy driven by financial-market normalisation materialises. Likewise, inflation is also expected to fall towards the end of 2008. 

Commissioner Almunia advised that maintaining the course of structural reforms and delivering "sound and stable" macro-economic policies was "the best way to cope with the current shocks facing the global economy". 

Europe was clearly beginning "to feel the impact of global headwinds in terms of lower growth and higher inflation," he warned, but hoped that "increased resilience thanks to the reforms already carried out" together with "sound fundamentals" would help EU countries to "weather the storm". 

The last such forecast, presented in November 2007, had predicted growth of 2.4% for 2008 (2.2% for the euro area), which in turn was less optimistic than the figures released last spring (see EurActiv 12/11/07).