EU revises growth forecast downward

The EU lowered its 2005 economic growth forecast to 1.5 per cent yesterday but said rising domestic demand would boost growth and employment next year.

In its autumn economic forecast the European Commission blamed high oil prices for lowering its previous estimate, made in April, of 2 per cent annual growth in the EU.

"After growing at potential last year, the economic performance of both the euro area and the EU was disappointing in the first half of the year," said the commission, which also cut the growth forecast for the euro-zone countries to 1.3 per cent from 1.6 per cent.

However, it predicted a recovery in growth during 2006 and 2007 underpinned by an acceleration in domestic demand. It forecast that the EU and eurozone economies would grow by 2.1 per cent and 1.9 per cent respectively in 2006, and accelerate further to 2.1 per cent and 2.4 per cent in 2007.

This predicted increase in growth should boost employment in the euro zone to 1.2 per cent in 2006, up from its current growth level of 1 per cent, said the commission.

Meanwhile, Ireland remained the top performer within the euro zone with a predicted 4.4 per cent rise in GDP in 2005 and 4.8 per cent in 2006. The commission said strong domestic demand was the main driver of growth while exports remained weak.

The autumn forecast said world GDP growth exceeded 5 per cent in 2004, the fastest pace since the early 1970s. However, economic growth decelerated in most regions of the world in the second quarter of 2005, with the slowdown most apparent in the manufacturing sector. But the forecast concluded that despite the soft patch in growth in the second quarter, the outlook for the global economy remained bright.

It forecast 3.5 per cent growth for the US economy in 2005 but warned this was unsustainable due to the size of the government deficit. It predicted growth of 3.2 per cent in 2006 and 2.7 per cent in 2007.

The commission noted that without a change in policies France, Germany and Italy would continue to run budget deficits above the EU ceiling of 3 per cent of GDP until 2007.