The European Commission cut its forecast for economic growth and raised its projection for inflation, reflecting the dilemma facing the European Central Bank. The economy of the 15 nations that share the euro will expand 1.8 percent this year, which is 0.4 percent below the rate predicted in November and the weakest since 2005. Inflation will average 2.6 percent, which is an increase from the previous estimate of 2.1 percent, the strongest since the euro began trading in 1999. The lethal combo of weakening expansion and rising inflation complicates the work of ECB, as it seeks to shield its economy from a US slowdown, without surrendering its campaign to restrain price pressures. The commission announced that economic activity is set to moderate, but the risks to the growth forecast remains sizeable.

The U.S slowdown is combining with costlier credit along with oil prices rising to about $199 a barrel and a rising euro to curb expansion. At the same time, higher energy prices and more expensive food are fanning inflation. Such risks prompted ECB President Jean–Claude Trichet to warn that stronger inflation and weaker growth, both were risks to economy. This was in stark contrast to his previous view that price pressures were the greatest threat. The central bank has left it’s benchmark interest rate at a six-year high of 4 percent since June and investors predict it will follow the Federal Reserve in easing credit by the end of second quarter.

Heineken NV, the Dutch brewer, announced that second-half profit fell by a third as slower economic growth in the US prevented the company from increasing prices in an effort to offset the rising cost of barley, metal and power. As a result, shares posted the biggest drop since 2003. The jump in credit costs from the collapse of the US subprime–mortgage market has sparked losses in stock markets around the world as Wall Street firms revealed $146 billion in losses on their debt holdings. Global stocks have lost more than $6 trillion this year. The commission’s growth forecast is more optimistic than the 1.6 percent prediction of the International Monetary Fund and the 1.7 percent median estimate of economists surveyed by Bloomberg News.

ECB releases new forecasts on March 6. Record–low unemployment, a balanced current account and “comparatively” low government budget deficits have cushioned the economy, the commission had said. In a review of individual economies, the commission slashed its forecast for growth in Italy by half to 0.7 percent amid a decline in confidence among executives. It predicted Spain would witness a “soft landing”, even as its real-estate market fades, with a growth of 2.7 percent this year, which is lower than its previous estimate of 3.0 percent. The commission said that weaker international growth explained its decision to cut its prediction for expansion in Germany from 1.6 percent to 2.1 percent and that for France from 1.7 percent to 2.0 percent.

Tags: European Economy News, European Union News //