EU sees euro zone economy weaken this year, Britain to halve growth by 2018

By Francesco Guarascio and Jan Strupczewski

BRUSSELS (Reuters) - Euro zone's economic growth is expected to lose some speed this year and to rebound in 2018 while the British economy will nearly halve its expansion by 2018, the European Commission said on Monday, warning of higher political risks.

The EU executive forecast that growth in the 19 countries sharing the euro would slow to 1.6 percent this year from 1.7 percent in 2016, but would gain speed in 2018 when the bloc's gross domestic product (GDP) is expected to increase by 1.8 percent.

Growth forecasts were slightly revised up for this year and 2018 from the Commission's previous estimates released in November when euro zone GDP was estimated to grow 1.5 percent this year and 1.7 percent in 2018.

 

The revision was due to "better-than-expected performance in the second half of 2016 and a rather robust start into 2017," the Commission said, noting however that "the outlook is surrounded by higher-than-usual uncertainty."

The "still-to-be-clarified" intentions of U.S. President Donald Trump in "key policy areas" are seen as the first cause of uncertainty for the bloc's economy, which will also face other political risks due to the likely beginning of Brexit negotiations this year and elections in several EU countries, the Commission said.

Britain is expected to pay a higher cost for the political uncertainty surrounding its divorce talks from the EU. Its GDP growth is forecast to decline from 2.0 percent in 2016 to 1.5 percent this year, and to further slow down to 1.2 percent next year.

Britain's "business investment is likely to be adversely affected by persisting uncertainty while private consumption growth is projected to weaken as growth in real disposable income declines," the Commission said.

The gloomy forecast on the British economy are however better than previously estimated by the Commission which had predicted in November Britain would grow 1.9 percent last year and only 1.0 percent this year. The 2018 forecast is unchanged.

INFLATION

Consumer prices in the euro zone are forecast to markedly pick up this year, as inflation will surge by 1.7 percent from 0.2 percent last year. The 2017 estimate is higher that the 1.4 percent inflation growth predicted by the Commission in November.

But euro zone inflation is expected to slow again in 2018 to 1.4 percent and core inflation, which excludes more volatile prices, is set to rise only gradually.

This is still "short" of the European Central Bank's target of an inflation "below, but close to 2 percent", the Commission said.

However, this is not seen as sufficient to keep the ECB's stimulus plan to continue indefinitely. "With inflation picking up from low levels, we cannot expect current monetary stimulus to last forever," the Commission's vice president Valdis Dombrovskis said, urging euro zone states to continue structural reforms.

(Edited by Alissa De Carbonnel)