February 13, 2020 / 10:12 AM / 15 days ago

EU leaves euro zone growth forecast unchanged, sees higher inflation

BRUSSELS (Reuters) - The European Commission on Thursday kept its economic forecast for moderate euro zone growth for this year and 2021 but raised slightly its projection for inflation, noting the spread of the coronavirus was the key downside risk.

European Union flags fly outside the European Commission headquarters in Brussels, Belgium, December 12, 2019. REUTERS/Yves Herman

In an interim outlook for gross domestic product (GDP) growth and consumer inflation for the 19 countries sharing the euro for 2020 and 2021, the Commission said growth in the euro zone would remain at 1.2% this year and next, as in 2019.

“The outlook for 2020 and 2021 is unchanged ... as more positive developments are counterbalanced by negative events elsewhere,” the Commission, the EU’s executive, said.

Inflation is likely to accelerate slightly, the Commission said, because of the likelihood of higher oil prices and the effect of higher wages passing through to core prices.

The Commission raised its forecast for consumer price growth to 1.3% in 2020 and 1.4% in 2021 from 1.2% and 1.3% respectively predicted last November.

The European Central Bank wants to keep inflation below, but close to 2% over the medium term, and has been buying government bonds on the secondary market to inject more cash into the banking system and stimulate lending.

“Still, domestic price pressures are expected to build up only slowly as firms are likely to continue tolerating lower profit margins,” the Commission said.

The EU executive said that while the first phase of a trade deal between the United States and China helped reduce risks to some extent, the spread of the Wuhan coronavirus was now the main threat to the growth forecast.

“The baseline assumption is that the outbreak peaks in the first quarter, with relatively limited global spillovers. The duration of the outbreak, and of the containment measures enacted, are a key downside risk,” the Commission said.

“The longer it lasts, the higher the likelihood of knock-on effects on economic sentiment and global financing conditions,” it said.

The Commission also said that while trade relations between the EU and Britain, which left the bloc on Jan. 31, were governed by the transition period agreement until the end of the year, there was “considerable uncertainty” as to what trade deal, if any, would be in place from the start of 2021.

Reporting by Jan Strupczewski, editing by Robin Emmott

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