The European Commission expects the eurozone economy to grow by 1.2% in 2014, upgrading a prediction made in the autumn, and suggesting better times ahead.

The “recovery in the European Union is gaining ground and spreading across countries”, Olli Rehn, the European commissioner for economic and monetary affairs and the euro, said on Tuesday (25 February).

However, he recognised that growth remained “modest”, and that there was still a risk from a prolonged period of low inflation or a slowdown in the pace of structural reforms.

Unemployment is also expected to remain at historically high levels into 2015.

The forecast upgraded a prediction made in November that the eurozone economy would grow by 1.1% in 2014. That upgrade was driven largely by an improved economic outlook in Spain, the eurozone’s fourth largest economy, and in the Netherlands, the fifth largest.

These improvements outweighed the downgrades meted out to Italy, the eurozone’s third largest economy, and to Finland.

The Commission raised its predictions for France and Germany, the two largest economies in the EU and the eurozone, albeit by only 0.1 percentage points. Germany is forecast to enjoy 1.8% annual growth in 2014, outstripping France, whose economy is expected to grow by less than the eurozone average, at just 1%.

The United Kingdom, which experienced a deeper recession following the financial crisis than either France or Germany, is predicted to outpace both countries in 2014. The UK economy will grow by 2.5% in 2014, according to the Commission, which upgraded its prediction of 2.2% in the autumn.

The Commission doubled the rate it had earlier forecast for Spain, predicting growth of 1% in 2014, and upped the expected growth for the Netherlands for the same year from 0.2% to 1%.

At the same time, the Commission cut its 2014 forecasts for Italy, down 0.1 percentage points to 0.6% annual growth, and for Finland, down 0.4 percentage points to 0.2%.

Road to recovery

Rehn outlined a number of factors expected to shore up the EU’s economic recovery.

One driver would be growth in the United States, whose economy is expected to grow by 2.9% in 2014, and another spur would come from growth in world trade. The Commission expects world import growth to double from 2.5% in 2013 to about 5% in 2014, and to rise to 6% in 2015.

Another driver would be a reduction in the fragmentation of the EU’s financial markets, as banks’ balance sheets improve, differences decrease between national debt markets, and reforms to the financial sector begin to take effect. This “should help to improve lending conditions for small and medium-size enterprises,” Rehn said.

Ireland, which received a €67.5 billion international bail-out in 2010, will show “increasingly robust employment growth”, with the jobless rate predicted to fall from 14.7% of the active population in 2012 to 11.2% in 2015.

Greece, which has received two bail-outs worth a total of €240bn, is predicted to enjoy a moderate rebound in annual growth in 2014, the first growth in the country since 2008. Greece posted a current-account surplus in 2013, the first time it has done so since 1948, said Rehn.

Downside risks

The Commission highlighted as the largest threat to the recovery a slowdown in structural reforms at the national and the European level, with its knock-on effect on economic sentiment.

Rehn also expressed concern over the eurozone experiencing a prolonged period of low inflation, impeding member states’ efforts to reduce their public debt levels. But he described the likelihood of outright deflation as “rather distant”.

The Commission’s revised forecasts predicted lower than expected inflation in Italy and in the Netherlands. Eurozone inflation in January was 0.8%.

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