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EU trims growth forecast over oil prices, banking turbulence

The European Union trimmed its economic growth forecast for 2008-09 by 0.3% on Friday as the effects of the global banking crisis and soaring oil prices began to bite.

But the 27-member bloc’s economy remains buoyed up by consumer spending in Europe and developing countries such as India and China, officials said as they announced the modest revision. “Clouds have clearly gathered on the horizon with this summer’s turbulence in the financial markets, the US slowdown and the ever-rising oil prices... But thanks to strong world growth and solid economic fundamentals, the negative impact should be limited,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.

According to the new figures, economic growth in the EU is expected to hit 2.9% in 2007, fall to 2.4% in 2008 and stay at that level through 2009. This spring, the EU had predicted a growth rate of 2.7% in 2008. For the 13-member group of countries which use the EU’s common currency, the euro, meanwhile, growth this year is expected to hit 2.6%, before falling to 2.2% in 2008 and 2.1% in 2009. Earlier figures had predicted 2.5% growth in 2008. It is the second time in recent months that the EU has revised its growth forecasts downwards. In September, following the global financial crisis sparked by problems in the US mortgage market, Almunia trimmed his spring growth forecasts by 0.1%. The consequences of that crisis, coupled with oil prices of close to $100 per barrel, mean that Friday’s revision might not be the last one seen.

Inflation is likely to accelerate this winter on the back of higher commodity prices, while “some segments of the financial markets are still malfunctioning, and a more prolonged period of uncertainty cannot be ruled out,” Friday’s press release stated. But employment is also on the rise across Europe, with all but five EU members expected to post improved job figures in the next two years. As a result, consumer spending looks set to become the European economy’s main driver, the report said. “Private consumption has picked up and is taking over as the main engine of growth on the back of a favorable employment outlook,” it said. And despite the turmoil which hit US and EU banks this summer, the economic performance of rising economies such as China and India has allowed Europe to offset at least some of the damage. “EU growth continues to be supported by a solid outlook for the world economy, especially the emerging economies, which largely compensates for the slowdown in the US,” the report said. (m&