Low inflation and Ukraine crisis trigger growth fears

The spectre of low inflation and the crisis in the Ukraine could overshadow the eurozone recovery for the next two years, the European Commission warned yesterday.

Its latest quarterly forecast, which trimmed the single currency bloc’s inflation outlook to 0.8 per cent this year and 1.2 per cent in 2015, comes as the European Central Bank comes under increasing pressure to ward off a potential deflation threat with further stimulus this week.

Policymakers have hinted that all options, including quantitative easing – effectively printing money to kick-start growth – are on the table.

The Commission stuck to its growth target of 1.2 per cent this year but lowered its forecast for 2015 from 1.8 per cent to 1.7 per cent. Vice president Siim Kallas said: “Price pressures are expected to remain subdued as we expect energy prices to continue to decline and as demand is only gradually firming and unemployment is still high.

When we consider what are the main risks for the European economy at this stage, the main one is clearly the external tensions and uncertainty which surround us, especially related to the crisis in the Ukraine.”

Wheat futures jumped more than 2 per cent to a year-high yesterday as tensions between Russia and the Ukraine – the world’s fifth and sixth largest exporters respectively – and fears over the impact of hot weather on the US harvest sent buyers into the market.

The Commission also harbours fears that threats from Russia to hike energy prices in response to European Union sanctions could also hit growth in countries sharing borders with Russia or dependent on its energy.

But its latest forecasts also show unemployment bouncing back more quickly than feared in February. Mr Kallas added: “Deficits have declined, investment is rebounding and, importantly, the employment situation has started improving.” It predicts every member of the euro except Cyprus will see growth this year.