Hopes that inflation might pick up in the eurozone have suffered a blow after the European Commission downgraded its forecasts for this year and next.
The commission said that inflation was set to remain “very low for longer than previously forecast” because of low oil prices and a slowdown in global growth.
Growth prospects, too, were downgraded, owing to the volatility in financial markets, the strength of the euro and a slowdown in emerging market economies, and despite a better-than-expected GDP figure for the eurozone in the first quarter.
The downgrade to inflation forecasts will be disappointing for the European Central Bank, which has adopted aggressive monetary policy measures to boost inflation and reach a target of 2 per cent. In March, the central bank introduced a “big bazooka” of measures, including cutting its main rate to zero, expanding quantitative easing by €20 billion a month to €80 billion and offering banks shorter-term loans to encourage lending.
The commission estimates that inflation will rise by a mere 0.2 per cent this year in the eurozone, down from the 0.5 per cent forecast in February and a 1 per cent forecast in November. Next year was downgraded to 1.4 per cent, from 1.5 per cent.
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“Oil prices fell again at the start of 2016, dragging inflation below zero,” the commission said. “External price pressure is also weak due to the slight appreciation of the euro and overcapacities in several emerging market economies that are holding back global producer prices.”
It said that the eurozone’s gross domestic product would expand to 1.6 this year from 1.5 per cent in 2015, and to 1.8 per cent in 2017. As well as slower growth in China, a slump in oil prices and increased global tension, the commission said that growth had been affected by uncertainty ahead of Britain’s referendum on European Union membership.
France, Spain and Italy all look set to miss their deficit reduction targets this year and next without further austerity measures or savings. The three economies are battling with huge debts and have struggled to keep below the EU’s deficit ceiling, which could bring fines for failing to meet their targets.
The commission said that France would fail to bring the gap below 3 per cent in 2017 without implementing new austerity measures. Spain’s deficit is set to increase to 3.9 per cent, significantly above its target of getting below 3 per cent, meaning that Madrid will be forced to make further cuts to public spending unless the EU allows it another extension, which it has done twice already over the past four years.
The Italian economy is expanding by 1.1 per cent this year, less than the commission’s forecast of 1.4 per cent. The country’s deficit for this year is expected to be at 2.4 per cent of GDP, the commission said.