THE EUROPEAN Commission revised its economic growth forecasts for the union downwards yesterday, blaming the US slowdown, the turmoil in financial markets and inflation.
It issued a particularly stark warning about rising commodity prices and called on EU governments to avoid agreeing excessive wage increases that could boost inflationary pressures.
"Wage increases above productivity in real terms mean higher inflationary risk," said EU monetary affairs commissioner Joaquín Almunia at the presentation of the spring economic forecast for the EU and the euro zone. "Inflation is the major problem we face in the short-term."
The commission's forecast projects economic growth at 2 per cent in 2008 and 1.8 per cent in 2009 for all 27 EU states, down from 2.8 per cent in 2007. For the 15 EU member states that have adopted the euro, economic growth is estimated at 1.7 per cent in 2008 and 1.5 per cent in 2009, down from 2.6 per cent in 2007.
The growth forecasts are half a percentage point lower than the commission's most recent forecast last autumn, reflecting what it describes as "the persisting turmoil in the financial markets, the marked slowdown in the US and soaring commodity prices".
All these factors are taking a toll on global activity, according to the commission, which nevertheless concludes that the EU economy is holding up relatively well thanks to sound fundamentals.
The commission is forecasting that the EU economy will create three million jobs in 2008-09 despite the tougher climate.
Mr Almunia pinpointed rising prices as the biggest problem in the short-term, noting "we are facing a very challenging time regarding inflation". The commission forecast predicts inflation will surge temporarily to 3.6 per cent this year due to soaring energy and food prices, up from 2.4 per cent in 2007. Average inflation in the euro zone is expected to peak at 3.2 per cent and fall to 2.2 per cent in 2009. The commission is forecasting gross domestic product growth in Ireland of 2.25 per cent in 2008 and 3.25 per cent in 2009, which is well below potential and past performance.
