Almunia upbeat on growth

BRUSSELS – The European Commission raised yesterday its economic growth and inflation forecasts for the eurozone for this year, and said it may also revise up 2007 growth projections in November. In its twice-yearly interim forecasts, the European Union executive body said eurozone growth would accelerate to 2.5 percent this year, the fastest pace since 2000 and nearly double the 2005 rate of 1.3 percent, thanks to rallying domestic demand. The Commission’s previous growth forecast from May was 2.1 percent for the 12 countries using the euro. The new prediction is in line with European Central Bank (ECB) projections issued last week. Economic and Monetary Affairs Commissioner Joaquin Almunia said that if anything, the 2006 growth estimate could be revised upward. «Looking further ahead, the updated economic growth outlook may result in an upward revision also for 2007. But the impact of a higher carryover into 2007 will have to be carefully assessed,» he said in a statement. In May the Commission forecast 2007 growth at 1.8 percent, but the ECB revised its own 2007 projection of 1.8 percent to 2.1 percent last week. The Commission will issue more detailed forecasts in November. The main risk to growth next year was the possibility of further oil price increases and a slowdown in the United States, the world’s biggest economy, Almunia told a news conference. But he noted how resilient the European economy has proven to be to the oil price shock, which saw crude prices rise to all-time highs of $80 per barrel in August. He also repeated the Commission’s view that Germany’s 3 percentage point increase in value-added tax at the start of next year would be neutral for growth over two years, saying the resulting slowdown in demand would be offset by more buying in anticipation of the rise at the end of 2006. Inflation Expensive energy was behind the increased inflation estimate for the eurozone, seen this year at 2.3 percent rather than the previously forecast 2.2 percent, Almunia said. The ECB, which markets expect will raise interest rates by 25 basis points to 3.25 percent on October 5, forecast last week inflation in a range of 2.3-2.5 percent. The ECB wants to prevent the energy price increases from triggering higher wage demands and price rises in other sectors, in what is called second-round inflation effects, but Almunia said such effects could not be seen so far. Almunia said rising productivity and wage demand moderation were to thank for that, but that this could change without ECB interest rates rises. «Now, HICP (EU-harmonized inflation) has started to receive the impact of oil price increases but during the last quarter this impact has not continued and core inflation has been stabilized,» Almunia said. «This is very good news but we should recognize this situation cannot be maintained without positive action from monetary authorities,» he said. He added that with the faster economic expansion, growth rate differences between eurozone members were diminishing, making the monetary policy of the ECB more efficient. Almunia said the stronger growth would help budgets in most of the EU’s larger countries to turn out better than expected and he urged governments to use the faster growth to cut budget deficits quickly and reform their finances. «Let’s use these good times to press ahead with further structural reforms and budgetary consolidation. Only this way will we be able to increase the growth potential where it is low and manage the necessary safety margin for when the going gets rough,» he said. He said he was monitoring Italy particularly carefully, where the government scaled down the size of initially planned net savings from 20 to 15 billion euros in next year’s budget despite the economy’s strong rally. «I hope that this political hurdle will be overcome and will not prevent the realization of proper fiscal consolidation,» he said. «I remain convinced that the efforts of the Italian government will be successful.»