The European Commission has sharply raised its 2008 inflation estimate for the euro zone to 3.2%. But, in its Spring economic forecast, it trimmed back its growth forecast only slightly to 1.7%.
In February, the body had forecast that inflation in the euro zone would reach 2.6% this year and that growth would be 1.8%. For Ireland, the commission is predicting GDP growth of 2.3% this year.
While record oil and food prices were taking their toll on growth and inflation, financial market turmoil and a US slump were proving to be worse than previously expected, the commission said.
'Economic growth is moderating in the EU and euro area and the current, imported inflationary pressures are a matter of concern,' EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.
The commission predicted that consumer prices growth would peak in the second quarter and cool down over the rest of the year and into 2009, bringing inflation in the euro zone down to 2.2% next year. The annual rate in the euro zone hit 3.6% in March, the highest since the euro was launched in 1999.
But the commission report was not all doom and gloom, as it raised its growth forecast for Germany this year from 1.6% to 1.8%.
Looking ahead to 2009, the commission predicted that economic activity would pick up towards the end of the year to about 2%, but the average growth rate would slow to 1.5%.
On Ireland, the commission said the picture was heavily influenced by the construction slowdown, and the extent and duration of the downturn remained uncertain. It expected the unemployment rate to rise to 5.6% this year and 5.8% next year, but said inflation would drop in 2009 as the effect of higher mortgage payments receded.
The commission said weaker growth and tax revenues meant the Government deficit could be worse than projected this year, and a projected slowdown in Government spending in 2009 might not be enough to stop this worsening in 2009.
