The European Union’s head office slashed its economic growth forecast for 2003 Wednesday and said that unemployment would probably worsen next year.
In its biannual Economic forecast, the European Commission projected “a mere 0.4 percent” growth this year in the 12 countries using the euro, down from the already anemic 1 percent estimated in April.
That would be less than half of last year’s growth rate and the third sub-par year in a row.
For the full 15-member EU — including Britain, Sweden and Denmark — growth for 2003 was expected to come in at 0.8 percent, down from April’s 1.3 percent forecast.
The “disappointing economic performance” was blamed on uncertainties surrounding the Iraq war, the “prolonged stock market decline” and worries about jobs and pensions, which shattered consumer and business confidence, the Commission said.
Next year Europe should return to average growth — 1.8 percent in the eurozone and 2 percent for the EU as a whole — spurred by “encouraging signals” from the U.S. and Asian economies.
But the report also warned job creation, at a standstill since the second half of 2002, would take even longer to rebound, particularly in manufacturing and construction.
It cited “the need for firms to focus on cost reductions ... together with the prospects for a mild recovery” as drags on job creation and warned another upward spike in the euro exchange rate could hurt export-dependent firms.
Joblessness, which peaked near 10 percent in the mid-1990s, had been on the decline until the recession of 2001.
The eurozone unemployment rate was forecast to rise to 8.9 percent in 2003 and 9.1 percent in 2004 before slipping in 2005 to 8.9 percent.
For the full EU, the projected unemployment rate figures were 8.1 percent in 2003, 8.2 percent in 2004 and 8.1 percent in 2005.
“These figures show the challenge we are facing and the need to accelerate labor market reforms in the union,” said EU economic commissioner Pedro Solbes.
The report said the economic recovery was expected to be aided by gradually easing of oil prices, to around $24 or $25 a barrel, and stabilization in the stock markets. It also cited low interest rates and falling inflation, which it forecast at 2.1 percent this year, 2 percent next and 1.7 percent in 2005.
“The main downside risk is related to the sustainability of the U.S. recovery,” Solbes added, citing concerns about deficits in the United States.
The eurozone’s two biggest economies — Germany and France — were not expected to get their budgets under control any time soon.
The Commission said Berlin could get its deficit under the 3 percent of gross domestic product cap in 2005 — but only if the German government manages a “full implementation of the announced proposals.”
It forecast deficits of 4.2 percent of GDP this year and between 3.25 percent and 3.9 percent in 2004, depending on the savings the German government can get through both houses of parliament.
Paris has pledged to trim its public deficit to 3.6 percent of GDP in 2004 and below the 3 percent limit in 2005. But the Commission said its analysis foresees only a “marginal” improvement from 4.2 percent this year to 3.8 percent in 2004 and 3.6 percent in 2005.
EU finance ministers were to consider Solbes’ recommendations for improving France’s budget picture at a meeting next week, including more budget-trimming than Paris had planned next year.
Paris has resisted and Solbes refused to say what the Commission’s next step would be if the recommendations are blocked.
Under EU rules, the Commission can propose fines of up to 0.5 percent of GDP on budget sinners but that would also require approval by finance ministers.
The report said average growth in the 10 countries joining the EU next year, mostly from eastern Europe, “remained solid” with a forecast of 3.1 percent in 2003. Their economies should grow even more after they join in May, but job creation remains low, it said.