Euro zone economy turns corner, but growth, inflation subdued-EU exec

Reuters

By Jan Strupczewski

BRUSSELS, Nov 5 (Reuters) - The euro zone economy willexpand slightly more slowly next year than previously expectedbecause of weaker private demand and investment and inflationwill stay well below the central bank target over the next twoyears.

The European Commission forecasts published on Tuesday arelikely to add to arguments for an interest rate cut by theEuropean Central Bank, which is to discuss its next policy moveon Thursday.

The European Union executive arm said in a regular forecastthat the economy of the 18 countries that will share the eurofrom next year will expand 1.1 percent in 2014 after a 0.4percent contraction this year. In 2015, the euro zone is toaccelerate to growth of 1.7 percent.

In May, the Commission forecast that the euro zone wouldgrow 1.2 percent in 2014, but it then made more optimisticassumptions on private consumption and investment, even thoughassumptions of government demand remained unchanged.

Nevertheless, recession was firmly behind the euro zone fromthe second quarter of this year and the pace of recovery wouldslowly accelerate quarter-on-quarter.

"There are increasing signs that the European economy hasreached a turning point," EU Economic and Monetary AffairsCommissioner Olli Rehn said in a statement.

"The fiscal consolidation and structural reforms undertakenin Europe have created the basis for recovery," he said.

Many euro zone governments were forced to sharply rein inspending over the last three years as investors began demandingunsustainably high prices for lending to them because of concernthey might never get paid back.

The tight fiscal policy was one of the main factors behindthe two-year euro zone recession, but it helped win back someinvestor confidence.

The Commission forecast the euro zone's aggregated budgetdeficit would shrink to 2.5 percent of gross domestic product in2014 and 2.4 percent in 2015 from 3.1 percent this year, asconsolidation now continues at a slower pace to help growth.

Public debt will peak at 95.9 percent of GDP next year, upfrom 95.5 percent this year and then fall to 95.4 percent in2015, the Commission said.

The Commission said that euro zone consumer price growth,which the ECB wants to keep below, but close to 2 percent over atwo year horizon, will be 1.5 percent this year and next andonly 1.4 percent in 2015 as unemployment stays at record highlevels around 12 percent.

But euro money market traders polled by Reuters said the ECBmight want to wait for more data before deciding to cut rates toa new record low and did not expect a change to the mainrefinancing rate this week.

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