European Union Lowers Growth Forecasts as Business Confidence Sags

“The economic and employment situation is not improving fast enough,” said Jyrki Katainen, the European Commission vice president for jobs and growth. Credit

“The economic and employment situation is not improving fast enough,” said Jyrki Katainen, the European Commission vice president for jobs and growth. Credit

“The economic and employment situation is not improving fast enough,” said Jyrki Katainen, the European Commission vice president for jobs and growth.

The Times – 5 November 2014

BRUSSELS — European Union officials on Tuesday sharply lowered growth forecasts as member states like France, Germany and Italy showed weak economic performance, and as business confidence suffered from heightened geopolitical risks.

Growth is expected to be a meager 1.3 percent in the 28-member bloc this year, instead of the 1.6 percent predicted in the spring, said the European Commission, the union’s executive arm. And the economy is not expected to get much better in 2015, when growth in Germany, the region’s economic engine, is expected to grind down to about 1 percent.

“The economic and employment situation is not improving fast enough,” Jyrki Katainen, the European Commission vice president for jobs and growth, said in a statement accompanying the closely watched economic forecast.

The European Commission’s Report on Economic Growth [PDF]
Shipping containers in the Hamburg harbor. Gross domestic product in Germany shrank by 0.2 percent from the first quarter.
Eurozone Recovery Stalls, With Weakness in Germany and France.
Shop windows in Rome advertise sales. The latest economic news dashed hopes that Italy was emerging from a decade of stagnation.
Italy Falls Back Into Recession, Raising Concern for Eurozone Economy.
Olli Rehn, the European Union’s commissioner for economics and monetary affairs, said growth this year is expected to flatline in the 28 countries of the Union.  E.U. Predicts Anemic Growth and High Unemployment in 2014.

Unless there are additional signs of growth and job creation in the next five years, “people could despair of the European project,” Pierre Moscovici, the European commissioner for economic and monetary affairs, said at a news conference on Tuesday.

The recovery on the Continent continues to lag those in the United States and Britain. Over the next two years, annual growth in Britain is expected to be close to 3 percent, and the unemployment rate is projected to be 5.5 percent in 2016, according to the data released Tuesday. The unemployment rate in the European Union is not expected to fall below double digits, where it has been since 2012, until 2016.

The gloomier outlook will most likely raise expectations for the European Central Bank to take additional steps to stimulate the economy, though economists said they did not expect policy makers to take action at a meeting on Thursday.

The report on Tuesday did not take into account how the European economy might get a boost from a 300 billion euro, or $375 billion, plan to invest public and private money into infrastructure projects. Jean-Claude Juncker, who took office this month as president of the European Commission, has pledged to present that package before the end of the year.

But how much of an effect that would have on lackluster growth remains to be seen. The spending program is unlikely to “change the whole world,” Mr. Katainen said, but “its contribution can be significant.”

The lower forecasts, especially in the 18-nation euro area, where the commission cut its projection for growth this year to 0.8 percent from an earlier 1.2 percent, are a measure of how quickly optimism about a recovery has dissipated. France has failed to grow as hoped, and Italy struggles to make overhauls. There are also signs that the German economy is stalling.

In one of the more drastic downgrades for 2015, the commission lowered Germany’s forecast for growth by nearly a full percentage point to 1.1 percent.

Among the problems facing European economies like Germany is the prospect of a “new cycle of sanctions and countersanctions” related to the restrictions that the United States and the European Union imposed on Russia in retaliation for its role in the Ukraine crisis, and reciprocal moves by Moscow, European Union officials said.

Those tensions “could pose a larger roadblock to European growth prospects than currently envisaged in the forecast,” the officials said in a report accompanying the forecasts.

The tensions might also “have triggered a wait-and-see attitude among firms,” the officials wrote in a section of the report that focused on Germany.

Germany is expected to post growth of 1.3 percent this year, down from an earlier forecast of 1.8 percent. The French economy is expected to grow 0.3 percent this year, down from an earlier estimate of 1 percent.

Italy appeared to stand out as a poor performer: Its economy was predicted to shrink 0.4 percent this year compared with a forecast in May for growth of 0.6 percent.

The commission also expressed concerns about inflation, which it said would remain very low this year and would not come close to the target of just under 2 percent anytime soon. It projected an annual inflation rate of 1.6 percent in the European Union in 2016.

“With confidence indicators declining since midyear and now back to where they were at the end of 2013, and hard data pointing to very weak activity for the rest of the year, it is becoming harder to see the dent in the recovery as the result of temporary factors only,” officials wrote in their report.

The commission said it expected growth rates to improve somewhat in 2015, rising to 1.5 percent in the European Union and to 1.1 percent in the eurozone.

Even so, weaker-than-expected growth this year is likely to make it much harder for countries like France and Italy to achieve the bloc’s mandated targets to keep budget deficits and government debt in check.

France and Italy could face disciplinary action and steep fines if they fail to show that they are making sufficient effort to bring their economies in line with European budgetary rules. Mr. Katainen said those recommendations would be published by the end of this month.

Over all, the commission said, the most recent figures indicate a slow fading of the legacy of the sovereign debt crisis, with many member states still weighed down by high unemployment, high debt and low output.

That prompted Mr. Katainen, the commission vice president, to call on member states to agree on the €300 billion spending plan to bolster demand.

“Accelerating investment is the linchpin of economic recovery,” he said.

Germany also “can play a significant role stimulating the euro area and E.U. economy” by saving less and spending more, Mr. Katainen said.

German medium-size businesses are already feeling the negative impact of Western sanctions imposed against Moscow, as Russia is turning towards Asia-Pacific nations for high-tech machinery and engineering systems.

“The innovative German machinery makers and engineering companies, mostly medium and small businesses, are being hit the hardest,” Volker Treier, deputy managing director of the German Chambers of Commerce (DIHK) said, as quoted by the Business Insider Tuesday.

Treier said he expects German exports to Russia to fall by about 20 percent in 2014.

“On the one hand, they are being directly hurt by the sanctions imposed by the European Union or due to lacking clarity about how they should be implemented. On the other hand Russian firms that placed the orders are facing higher financing costs due to a credit crunch and ruble’s devaluation,” Treier explained.

On Tuesday, the German-Russian Foreign Chamber of Commerce (AHK) said that, based on a new survey of German businesses operating in Russia, the so-called Mittelstand companies (small-scale businesses that form the backbone of Germany’s economy) were being hit badly by the fallout from Western sanctions, particularly in the industrial manufacturing sector.

“China is the distinct beneficiary” of Europe’s sanctions policy toward Russia, AHK President Rainer Seele said, as quoted by The Wall Street Journal Tuesday.

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