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European Commission Raises Eurozone Growth Forecasts Despite Severe Risks

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Eurozone growth is set to slow less this year than expected earlier, as the economy has shown strong resilience to the negative shock from 'Brexit' last year, a report from the European Commission said Monday. However, the outlook faces a higher-than-usual degree of uncertainty as the U.K. formally triggers its exit from the European Union and the new US President Donald Trump tries to implement his protectionist plans.

Gross domestic product of the single currency region is expected to grow 1.6 percent this year after 1.7 percent growth in 2016, the executive arm of the EU said in its Winter 2017 Forecast. Growth for this year was earlier seen at 1.5 percent.

The euro area forecast for next year was raised to 1.8 percent from 1.7 percent. Growth is expected to remain driven by domestic demand. Investment growth is expected to continue subdued.

Growth forecasts were revised due to better-than-expected performance in the second half of 2016 and a robust start to 2017, the report said.

The growth projection for EU for this year was raised to 1.8 percent from 1.6 percent. The projection for next year was maintained at 1.8 percent.

All EU member states grew last year and the trend is set to continue this year and next, the report said, adding that it was for the first time in almost a decade that all economies were expanding for the entire forecasting period.

The report noted that the risks surrounding these projections were "exceptionally large" and have increased, but were tilted to the downside.

"Uncertainty is rising to an extraordinarily high level, driven by the uncertain outcome of the UK's 'Brexit' negotiations and by upcoming elections in a number of large Member States," the commission said.

"The outcome of the US presidential election adds some upside risks related to fiscal stimulus, but has also raised the possibility of isolationist and protectionist policies that would hurt the global and European economy, should they be enacted."

Contributing to the uncertainty is the current stand-off between Greece and its creditors.

EU Economic and Financial Affairs Commissioner Pierre Moscovici said, "With uncertainty at such high levels, it's more important than ever that we use all policy tools to support growth."

The euro area inflation forecast for this year was raised to 1.7 percent from 1.4 percent. The projection for next year was left unchanged at 1.4 percent.

"The depreciation of the euro against the dollar and rising global input price pressures are set to drive import prices further up in 2017, contributing to a rise in headline inflation this year," the report said.

"The impact of positive base effects in energy inflation, however, is set to fade over the forecast horizon."

The comission also expects a slight increase in wages this year and next, as well as the narrowing and closure of the output gap, to begin supporting a moderate and gradual pick up in underlying price pressures.

Unemployment in the euro area is expected to fall to 9.6 percent this year from 10 percent in 2016. The rate is seen dropping further to 9.1 percent in 2018. These are the lowest unemployment figures since 2009 but remain above pre-crisis levels, the report said.

Public deficit and the government debt-to-GDP ratio are expected to fall further this year and next. The euro area deficit is expected to decline from 1.7 percent of GDP last year to 1.4 percent this year and next. This decline reflects lower interest spending due to exceptionally low interest rates, the report said.

Debt as a percentage of GDP is expected to drop from 91.5 percent in 2016 to 90.4 percent this year and to 89.2 percent in 2018.

Regarding the U.K., which opted to leave the EU in a referendum held on June 23 last year, the report said the impact of the vote on the country's growth has yet to be felt. The recent growth momentum is expected to largely continue in the first quarter, but ease notably thereafter mainly due to an expected slowdown in private consumption growth.

The commission raised the UK growth estimate for 2016 to 2 percent from 1.9 percent. The projection for this year was lifted to 1.5 percent from 1 percent and the outlook for next year was held unchanged at 1.2 percent.

by RTT Staff Writer

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