EU Cuts 2008 European Growth Outlook, Sees Economy Staying Weak

By Fergal O'Brien

Sept. 10 (Bloomberg) -- The European Commission cut its growth estimate for the euro area this year and signaled it may also lower its 2009 forecast as the U.S. and Asian economies cool.

The economy of the 15 nations that use the euro will probably expand 1.3 percent this year, the Brussels-based commission said today, revising down its April forecast of 1.7 percent. ``Developments in the global economy seem to suggest a significant downward revision for 2009,'' it said, referring to forecasts it plans to publish in November.

Europe's economy shrank in the three months through June and data since suggest the slump has extended into the current quarter. Manufacturing and services activity contracted for a third month in August and confidence dropped to the lowest in more than five years. Even with a cooling economy, the European Central Bank has resisted cutting interest rates as it seeks to tackle inflation that reached a 16-year high in July.

``The continuation of the turmoil in the financial markets one year on, the near doubling of energy prices over the same period and the correction in some housing markets have had an impact on the economy,'' Economic and Monetary Affairs Commissioner Joaquin Almunia said in today's report.

While the commission raised its inflation forecast for 2008 to 3.6 percent from 3.1 percent, it said consumer-price growth ``may be at a turning point'' after oil prices fell from a record and as past increases in food and energy costs ``gradually fade in the coming months.''

`Some Relief'

Almunia also said the recent fall in commodity prices and the euro ``have provided some relief.''

Since reaching a record $1.6038 against the dollar on July 15, the currency has dropped around 12 percent to $1.4163 today. Oil prices have fallen almost 30 percent in the last two months to $103.84 a barrel.

Still, the euro's advance and the surge in energy prices have already taken their toll. Paris-based L'Oreal SA, the world's largest cosmetics maker, on Aug. 29 reported the slowest profit growth in three years. Stora Enso Oyj and UPM-Kymmene Oyj, Europe's largest papermakers, today said they will close unprofitable production lines, as raw-material and energy costs have outpaced their ability to raise prices.

Banks including Amsterdam- and Brussels-based Fortis and Irish Life & Permanent Plc of Ireland have suffered due to writedowns, losses or increased funding costs related to the credit crisis. Credit Agricole SA, France's third-largest bank, today said it will eliminate about 500 jobs at its Calyon corporate- and investment-banking unit to rein in costs following three consecutive quarterly losses.

`Downside Risks'

``The main downside risks identified in the spring forecast have materialized, with the financial turmoil deepening, commodity prices soaring and the shocks to several housing markets spreading more widely,'' the commission said in the report. It sees a ``marked deceleration'' ahead in most Asian economies and predicts that the effect of a tax rebate that boosted second-quarter U.S. growth will fade.

The ECB last week lowered its euro-region growth outlook and raised its inflation projections for this year and next. ECB President Jean-Claude Trichet said today in Brussels that inflation ``is likely to remain high for quite some time, moderating only gradually during the course of 2009,''

The European Commission has backed the ECB's monetary- policy stance, with Almunia saying yesterday that policy makers are ``doing a good job in difficult conditions and they deserve our full confidence and support.''

U.S. Orders

Some companies have tried to offset falling European and U.S. orders by expanding in Asia and oil-exporting countries. German exports to India more than tripled in the four years through 2007, according to figures from that nation's statistics office.

Adidas AG Chief Executive Officer Herbert Hainer last week repeated the company's forecast, saying growth in emerging markets following this summer's Beijing Olympics will drive sales at the second-largest sporting-goods maker. Volkswagen AG, Europe's biggest carmaker, on Sept. 8 said emerging markets will provide the fastest growth in worldwide sales over the next 10 years, led by economic expansion in Asia and Russia.

``The risks to the growth outlook stay tilted to the downside. In particular, developments in commodity and financial markets will continue to be the key factors shaping the growth outlook,'' the commission said. ``The risks to the inflation outlook appear somewhat more balanced, albeit they are still tilted to the upside.''

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net