Brussels slashes inflation forecasts, but optimistic on growth

Inflation in the euro area in 2016 was set to undershoot Brussels´s previous expectations by a very wide margin as a result of the falling oil price, but only temporarily, the European Union´s executive arm said.

In its Winter 2016 economic forecasts, released on Thursday, the European Commission predicted gross domestic product in the single currency bloc would grow by 1.7%, down slightly from the 1.8% Brussels estimated in November 2015.

However, as a result of the drop in crude oil prices - and partly as a result of subdued wage growth - inflation as measured by the CPI was now seen rising by only 0.5% year-on-year, well below the 1.0% rise the Commission had penciled in before.

On the one hand, but on the other ...

The Commission also cited a range of risks which were weighing on the outlook, but held out the possibility that "current suppportive factors" might lead to greater momentum in the economy, especially if investment recovered.

Brussels said: "the economic outlook remains highly uncertain and overall risks are increasing. These include lower growth in emerging markets, a disorderly adjustment in China, and the possibility that further interest rate rises in the United States could cause disruption in financial markets or hurt vulnerable emerging economies and weigh on the outlook."

Over 2017, GDP was still expected to grow at a 1.9% year-on-year clip and CPI inflation to pick up to a 1.7% pace.

Brussels projects fall in debt pile

Economists in Brussels also sounded an upbeat note on the bloc´s public finances, predicting the general government deficit would shrink from 2.2% of GDP in 2015 to 1.9% this year and 1.6% in 2016.

That would allow the debt-to-GDP ratio for the Eurozone to come down from its peak of 94.5% reached in 2014 to 91.3% in 2017.

For the European Union, Brussels´s numbers pointed to a fall from 91.3% to 85.7% over that same time period.