Bloomberg News

EU Cuts Euro-Area 2nd-Half Growth Forecasts on Debt Crisis

September 15, 2011

(Adds economist comment in eighth paragraph.)

Sept. 15 (Bloomberg) -- The European Union cut its growth forecasts for the second half to reflect a worsening outlook on the sovereign-debt crisis and warned the euro-area economy may come “close to standstill at year-end.”

The 17-nation euro region will expand 0.2 percent in the third quarter and 0.1 percent in the fourth, down from an estimate in March for 0.4 percent expansion in both periods, the European Commission in Brussels said today. The growth outlook for Germany, Europe’s biggest economy, was lowered to 0.4 percent for the third quarter and 0.2 percent for the fourth, down from 0.5 percent for each quarter earlier. It forecast no growth for Italy in the second half.

“The outlook for the European economy has deteriorated,” Olli Rehn, EU economic and monetary affairs commissioner, said in a statement. “The sovereign-debt crisis has worsened, and the financial market turmoil is set to dampen the real economy.”

Group of Seven finance chiefs vowed on Sept. 9 to make a “concerted effort” to support growth as efforts to rein in budget deficits curtail demand and increasing concerns about Greece’s ability to avoid a default roil financial markets. Exports from Germany, the region’s largest economy, declined in July while investors and executives grew more pessimistic last month as the sovereign-debt crisis threatened to engulf Spain and Italy.

German Growth

The euro rose against the dollar after the report, trading at $1.3811 at 11:38 a.m. in London, up 0.4 percent on the day.

The commission forecast the euro region will expand 1.6 percent this year, the same as it predicted in May. It raised its forecast for annual German growth to 2.9 percent from 2.6 percent. It forecasts 2.5 percent euro-area inflation this year, compared with a prediction of 2.6 percent in May.

“They are too optimistic,” said Tobias Blattner, a former ECB economist now at Daiwa Capital Markets Ltd. in London. “We don’t think Germany will make the quarterly growth numbers they are forecasting and that’s why euro-area growth will be lower.”

The commission cut its 2011 forecast for Italy while maintaining its prediction for Spain, whose bond yields surged to euro-era highs in August, prompting the European Central Bank to intervene to prop up the two countries’ bond markets. Italy will expand 0.7 percent compared with an earlier prediction of 1 percent, and Spain will expand 0.8 percent.

Italy, Spain

In the third and fourth quarters, Italy will show no growth, and Spain will expand just 0.1 percent, according to today’s projections.

France’s economy, which stagnated in the second quarter, will grow 1.6 percent this year, down from 1.8 percent seen in May, the commission said. The Netherlands will expand 1.7 percent versus 1.9 percent, the commission said. France will grow 0.2 percent in each of the next two quarters, while the Netherlands will expand just 0.1 percent in each of them.

Central bankers see a “slowing down in comparison with what has been observed,” ECB President Jean-Claude Trichet said on Sept. 12 after leading the Global Economy Meeting in Basel, Switzerland. The ECB cut its 2011 euro-area growth forecast on Sept. 8 to 1.6 percent from 1.9 percent. It sees inflation at 2.6 percent this year and 1.7 percent next, compared with the bank’s ceiling of 2 percent.

--With assistance from Kristian Siedenburg in Budapest. Editors: Jones Hayden, Jennifer Freedman

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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