EU raises ‘10 growth forecast to 0.7% even as deficits soar

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: The euro-area economy may expand 0.7% next year, the European Commission said, raising its growth forecast even as budget deficits and jobless ranks swell further.

The economy of the 16 countries sharing the euro will resume growth in 2010 and expand 1.5% in 2011, after contracting 4% this year, the Brussels-based commission, the European Union’s executive, said on Tuesday in its semi-annual economic forecasts. It previously forecast a 0.1% contraction in 2010. The region’s average budget deficit will swell to 6.9% of gross domestic product next year and slip to 6.5% in 2011 and unemployment will rise into 2011, reaching 10.9% the highest since at least 1995.

European companies from STMicroelectronics NV to Pernod Ricard SA cited signs of recovery as they reported earnings in the past month, suggesting that record-low interest rates and government stimulus measures are feeding into the broader economy. Even as consumer confidence improves, soaring budget deficits and unemployment rates threaten to undermine the recovery from the worst recession in six decades.

“While the recession may be over, the impact of the crisis is not,” the commission said in the report. For a “solid, sustainable” recovery, “it will be key to tackle the labor- market and debt challenges.” The commission’s growth forecasts are more optimistic than predictions from the International Monetary Fund on Oct 1 that the region will grow 0.3% next year after a 4.2% contraction in 2009. The IMF forecast an unemployment rate of 11.7% for next year.

The euro, which has strengthened 10% against the dollar in the past six months, traded at 1.4739, down 0.2% from Monday before the report. Inflation next year will remain below the 2% ceiling set by the European Central Bank, the commission said, with annual price declines projected in Ireland in 2010. The euro- area inflation rate will be 0.3% this year, rising to 1.1% next year and 1.5% in 2011, it said.

The Frankfurt-based ECB, which aims to keep inflation just below 2%, expects annual price growth to average about 0.4% this year and 1.2% in 2010. ECB president Jean-Claude Trichet said on Oct 8 that inflation would turn positive again “in the coming months” and inflation expectations are “anchored.”