High oil prices and a strong euro will depress economic growth in the euro zone to 1.6 per cent this year from 2 per cent in 2004, but growth will rebound next year, the European Commission forecast today.
In its twice-yearly forecast the European Union executive said gross domestic product in the 12-nation euro zone would accelerate to 2.1 per cent in 2006 thanks to growing domestic demand and investment amid falling inflation and unemployment.
The new euro zone growth forecast is revised down from 2.0 per cent the Commission predicted for 2005 in October and the 2.2 per cent growth it had expected for 2006.
For the whole of the European Union of 25 countries, the Commission forecast growth of 2.0 per cent this year and 2.3 per cent in 2006, down from 2.4 per cent in 2004. This is still well below the 3.6 and 3.0 per cent expansion rates seen for the United States but better than the 1.1 and 1.7 per cent, respectively, forecast for Japan.
"The Commission sees a number of downside risks to its forecasts, including oil price hikes, disorderly exchange rate adjustments and more subdued consumer confidence, which, if confirmed, would weigh on private consumption growth and could also hold back investment plans," the Commission said.
Germany will break the European Union's budget deficit limit for the fourth year in a row in 2005, the European Commission forecast.
It said Europe's largest economy was likely to be joined by three of the other 11 euro zone countries in exceeding the 3 per cent of gross domestic product limit set by the EU's Stability and Growth Pact that underpins the euro.
In its twice-yearly economic the Commission forecast that the German general government shortfall would be 3.3 per cent of GDP this year.
But Berlin may avoid sanctions, the Commission said. "This central estimate leaves the chance to avoid a fourth consecutive breach of the 3 percent of GDP ceiling," the Commission said in its report. The weakened rules, called the Stability and Growth Pact, say that any breach of the deficit limit must be small and temporary.
The Commission expects the German deficit would shrink to 2.8 per cent next year thanks to the effects of labour market reforms and higher growth which will boost tax income.
The Stability and Growth also gives offending countries more leeway in avoiding sanctions, especially if they reduced the deficit by 0.5 percent of GDP during the year.
Germany will have reduced it by 0.4 per cent in 2005.