EU cuts euro zone growth forecast, blames U.S. trade wars

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BRUSSELS (July 12): The European Commission on Thursday cut its forecasts for the euro zone's economic growth this year, citing among the top causes for its revision trade tensions with the United States and rising oil prices which push the bloc's inflation higher.

The slowdown of the euro zone economy is set to affect all major economies of the bloc, but is expected to hit Italy harder, as the country will record the lowest growth rate in Europe, matched only by Britain among all 28 EU countries.

The EU executive estimated the 19-country euro zone will grow by 2.1% this year, lower than the 2.3% gross domestic product (GDP) increase it had forecast in its previous estimates released in May, and further below the 2.4% growth recorded last year.

In 2019 the bloc's growth should further slow to 2.0%, unchanged from the previous forecast. 

"The downward revision of GDP growth since May shows that an unfavourable external environment, such as growing trade tensions with the U.S., can dampen confidence and take a toll on economic expansion," EU commission's vice-president Valdis Dombrovskis said.

The negative impact of trade disputes on the European and global economy are expected to be much bigger in case of escalation, the EU economics commissioner Pierre Moscovici said.

"Trade wars produce no winners, only casualties," he stressed.

Rising oil prices have also contributed to the slowdown, the commission said, and are expected to push euro zone's inflation up to 1.7% this year and next, from the previously estimated 1.5% in 2018 and 1.6% in 2019.

UK, Italy blues

Germany and France, the two largest economies of the euro zone, are expected to lose steam this year and next.

Germany's GDP expansion will slow to 1.9% this year and in 2019, from the previously estimated 2.3% in 2018 and 2.1% in 2019. It grew 2.2% last year.

France's economy will grow 1.7% this year and next, much below the 2.2% growth it experienced last year. The new estimates are also less optimistic than the 2.0% growth the Commission had earlier forecast for this year and also slower than the 1.8% growth previously forecast for 2019.

The slowest-growing economy of the bloc will remain Italy, which is expected to grow only 1.3% this year, less than the 1.5% estimated in May. The economy will further slow to 1.1% in 2019, farther down from the 1.5% growth recorded last year.

One of the causes cited by the Commission for the revision were "re-emerging concerns or uncertainty about economic policies", as Italy's new eurosceptic government has launched ambiguous messages on its future spending plans.

Only Britain is expected to match Italy's sluggish growth among all the 28 states of the European Union. It will grow 1.3% this year, according to the Commission, less than the previously estimated 1.5% expansion — a big drop from the 1.7% GDP rise recorded last year.

In 2019, when Britain is expected to quit the European Union, its economic expansion should slow further to 1.2%, the commission predicted.

It stressed however that next year's forecast was based on technical assumptions, as the unclear outcome of Brexit talks could have unpredictable effects on the country's economy.

Britain's inflation is also forecast to go up further to 2.6% this year, from a previous estimate of 2.5%.