Europe’s economic growth outlook falls as high prices plague consumer spending

Frankfurt: The European Union has lowered its forecast for economic growth this year and next, saying inflation is taking a heavy toll on people’s willingness to spend in shops while higher interest rates are sharply restricting the credit needed for investment and purchases.

The revised forecast Monday from the European Commission, the EU’s executive arm, comes as fears of recession grow and as the European Central Bank faces a key decision this week on whether to keep raising rates, which are aimed at getting inflation under control.

The 20 countries that use the euro currency are expected to see growth of 0.8 per cent this year instead of 1.1 per cent projected in the spring forecast, the commission said. For next year, growth expectations were lowered to 1.3 per cent from 1.6 per cent.

“Weakness in domestic demand, in particular consumption, shows that high and still increasing consumer prices for most goods and services are taking a heavier toll than expected,” a commission statement said.

EU Economy Commissioner Paolo Gentiloni said at a news conference that “further weakening in the coming months” was foreseen as the economy faces “multiple headwinds.”

One source of uncertainty is how far the ECB will go on interest rates more expensive credit restrains economic growth in some areas such as real estate, but if higher rates succeed in lowering inflation, that would boost consumer spending power.

Recession fears have grown even after the eurozone scraped through the winter without one, recording stagnant growth of 0.1 per cent in the first two quarters of this year.

Surveys of purchasing managers show that economic activity is contracting in all major eurozone economies, according to Alexander Valentin, senior economist at Oxford Economics, data that “add to mounting recession risks.”

A key source of weakness has been Germany, whose manufacturing- and export-oriented economy has been hit by higher energy prices and slowing demand in China, a key trade partner.