EU to Cut Economic Growth Forecasts, Almunia Says

By Fergal O'Brien and Christian Vits

Sept. 9 (Bloomberg) -- The European Union will cut its economic-growth forecast this week as confidence wanes and inflation expectations increase, EU Commissioner Joaquin Almunia said, calling the outlook ``unusually uncertain.''

``The prospects for the second half of 2008 and the beginning of 2009 are not very good,'' Almunia, who is in charge of economic and monetary affairs, said in a speech in Frankfurt today, citing forecasts by the European Central Bank and the Organization for Economic Cooperation and Development. ``Tomorrow I will present our updated forecasts for this year and unfortunately I don't expect to convey a different message.''

Europeans' confidence fell to the lowest in more than five years in August after the euro-area economy contracted in the second quarter for the first time in almost a decade. The ECB last week lowered its 2008 euro-region growth forecast to 1.4 percent from 1.8 percent and its 2009 prediction to 1.2 percent from 1.5 percent. The OECD also cut its forecast for the region.

Exports from Germany, Europe's largest economy, declined more than economists forecast in July as cooling global growth curbed demand, according to figures published today. Spanish Finance Minister Pedro Solbes said his nation's economy, the fourth-largest in the euro region, is at risk of entering a recession because of a construction slump and tight credit conditions.

Euro Region

Luxembourg Finance Minister Jean-Claude Juncker, who leads a group of counterparts from the euro region, last week said the EU may cut its 2008 growth forecast to as low as 1 percent. It forecast growth of 1.7 percent in April.

Speaking to reporters after his speech in Frankfurt today, Almunia said he expects the slowdown in growth to be temporary.

``I hope the recovery will start in 2009,'' he said. ``In 2010, growth figures will return in line with potential.''

In the meantime, the ECB, which raised its key interest rate to a seven-year high of 4.25 percent in July to combat inflation, is showing little inclination to cut borrowing costs even as expansion cools. At the same time it cut its growth forecasts, the central bank raised its inflation prediction for 2008 and 2009.

While inflation eased in August to 3.8 percent from 4 percent, the highest in 16 years, ``this does not mean we should underestimate the risks of second-round effects,'' Almunia said today. Inflation expectations are ``moving to the upside.''

Almunia also said he expects losses related to the collapse of the U.S. subprime-mortgage market, which have already reached $500 billion, to increase.

``Hopes that we had come through the worst of the turbulence before the summer have proved unfounded,'' he said. ``Few predicted the scale of losses and writedowns we are seeing in the banking sector'' and ``there is undoubtedly more to come.''

To contact the reporters on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net; Christian Vits in Frankfurt at cvits@bloomberg.net.