EU Cuts GDP Forecast, Sees Inflation Accelerating (Update1)

By Fergal O'Brien


Nov. 9 (Bloomberg) -- The European Commission cut its forecast for economic growth next year and said inflation may accelerate faster than previously anticipated as energy and food costs soar.

The economy of the 13 nations that share the euro will expand 2.2 percent next year, the Brussels-based commission said today in its autumn forecasts, 0.3 percentage points lower than it previously predicted. The pace of growth will ease further in 2009, to 2.1 percent, it said.

A U.S. housing slump, higher credit costs and oil prices close to $100 a barrel are all weighing on Europe's economy. As the euro appreciates to new highs and growth slows in the U.S. economy, the world's largest, those factors may sap demand for European goods, further curbing growth.

``Clouds have clearly gathered on the horizon,'' EU Economic and Monetary Affairs Commission Joaquin Almunia said in a statement today. ``Economic growth is becoming more moderate and the downside risks have clearly increased.''

The commission raised its 2008 inflation forecast, saying consumer-price growth will accelerate to 2.1 percent from 2 percent this year, above the European Central Bank's 2 percent limit. The commission previously expected inflation to average 1.9 percent next year.

Crude Oil

Crude oil prices have risen 58 percent this year and reached a record $98.62 a barrel on Nov. 7, boosting energy costs for companies and consumers. ECB President Jean-Claude Trichet yesterday said the inflation ``hump'' from increases in commodity prices will be ``a little bit longer and certainly bigger in terms of magnitude'' than expected.

The ECB yesterday left its key interest rate unchanged at 4 percent and Trichet indicated the rate may be unchanged for months, saying that both inflation and the euro's advance against the dollar are cause for concern.

The euro has gained 15 percent against the dollar in the last year, which makes European exports less competitive, and reached a record $1.4731 on Nov. 7. Measured against an index of the euro area's 24 main trading partners, the currency has risen 6.3 percent in the last year, around half of that in the last two months. Trichet said recent currency moves have been ``undoubtedly sharp and abrupt.''

The commission today raised its forecast for 2007 GDP growth to 2.6 percent from 2.5 percent. The economy grew 2.8 percent last year, the fastest pace since 2000.

Consumer Confidence

Still, recent data indicate growth in the euro-area economy is cooling. Manufacturing grew at the slowest pace in more than two years in October, and business and consumer confidence declined for a fifth straight month.

Bayerische Motoren Werke AG, the world's largest maker of luxury cars, on Nov. 6 reported lower-than-expected earnings partly because of the euro's strength. The Munich-based company gets about 25 percent of sales from the U.S., its largest market.

Waterford Wedgwood Plc, the Irish maker of Royal Doulton crystal and tableware, yesterday said its first-half loss widened as sales dropped and the dollar weakened.

Europe's growth may also be undermined by the fallout from defaults on U.S. subprime mortgages, which hurt some of Europe's largest banks, pushing overnight lending rates to a six-year high. The commission said today its forecasts assume that the ``turbulence'' will ``peter out gradually.''

`Strong World Growth'

``Thanks to strong world growth and solid economic fundamentals, the negative impact'' on growth ``should be limited,'' Almunia said.

Germany's economy, Europe's largest, will expand 2.5 percent this year, before growth easing to 2.1 percent in 2008 as slowing world demand and the euro's appreciation damp exports, the commission said. Growth will average 2.2 percent in 2009, it forecast.

French economic growth will accelerate to 2 percent from 1.9 percent, while Italian growth will drop to 1.4 percent next year from 1.9 percent.

The commission raised its inflation forecast for the 10 eastern EU members this year, citing growing household consumption and regulated price increases. Hungary's inflation rate may rise to 7.7 percent, compared with a May forecast of 7.5 percent, and Polish inflation may accelerate to 2.5 percent.

Beyond the euro area, U.S. economic growth will slow to a six-year low of 1.7 percent in 2008 from an expected 2.1 percent in 2007, according to today's report. The U.K. economy will grow 3.1 percent and 2.2 percent this year and next.