FRANKFURT(MNI)- The Eurozone’s economy may be recovering more
slowly than previously expected while inflation may turn out to be less
benign than forecast, European Commission said in its Spring Forecast on
Friday.

The Commission’s forecasts sees the Eurozone’s economy contracting
by 0.3% in 2012 and returning to modest growth of 1.0% in 2013.
Inflation is expected to average at 2.2% this year and fall to 1.7% in
2013, the report showed.

“In the first three months of 2012, leading indicators were showing
signs of a bottoming-out, suggesting that the recession would be mild
and short-lived,” the report said. “More recently published indicators
have dampened expectations,” it noted, adding that indicators “have been
rather weak in the past months.”

This mirrors a recent warning by ECB President Mario Draghi, who
cautioned last week that “the most recent survey data show uncertainty
prevailing” and indicated further data is required to assess whether the
baseline scenario might have to be changed.

In particular, the Commission observed that industrial new orders
have been on a downward trend since autumn, limiting “expectations for a
near rebound in industrial production and so does not bode well for
overall economic growth in the near term.”

Given high uncertainty, consumers and investors will likely
postpone spending decisions, the report said. “In addition, the weak
labour market conditions and unfavourable developments in real incomes
do not bode well for an expansion.” The Commission forecast Eurozone
unemployment at 11% through 2013.

Nevertheless, the Commission continues to expect a recovery in the
second half of 2012 as “important policy decisions in the euro area that
have already helped to avoid a sharp decline in economic activity in the
past months, should help to further restore consumer and investor
confidence.”

“The assumed gradual return of confidence can be expected to exert
an increasingly positive impact on private domestic demand. Credible
fiscal consolidation measures and structural reforms should support this
development. And the moderation in commodity prices, lowering
inflationary pressures is forecast to impact positively on real
incomes,” the report said.

The Commission expressed confidence that the upcoming recovery will
be more sustainable than the previous rebound in 2009 as planned
structural reforms allow for a more sustainable recovery than three
years ago.” As a result it expects the economy to gain further traction
in 2013 and “to grow nearly as strongly as in 2010, the year with the
highest growth rate since 2007.”

With regard to prices, the Commission’s baseline scenario sees
inflation pressures receding and headline inflation falling below the
European Central Bank’s price stability target of close to but below 2%
in 2013. However, the report cautioned that this forecast may be
optimistic.

Inflation is expected to decline “owing to the fall in energy
inflation, reflecting base effects related to oil price hikes in early
2011,” the report said. In addition, weak activity is likely to
constrain wage increases and lower the prices-setting power of
producers, while the weakness of private consumption will limit the
price-setting power of retailers, the report continued.

However, the Commission cautioned that the HICP forecast for 2013
is based on a no-policy-change assumption. “This could imply that the
forecast ignores increases in indirect taxes and administered prices,
which might exert temporary effects on headline HICP inflation, and
which could then result in higher rates than currently forecast for
2013,” the report said.

On the fiscal front, the Commission forecast is largely unchanged
compared with the 2011 autumn forecast.

“Against a backdrop of a temporary weakening in 2012 and a
prospective gradual economic recovery in 2013, as well as planned and
adopted fiscal consolidation measures across Member States, the
declining trend in budget deficits is expected to continue over the
forecast horizon,” the Commission said.

— Frankfurt bureau: +49 69 720 142; email: jtreeck@marketnews.com —

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