European Commission slashes Greek growth forecast

The European Commission on Tuesday slashed its 2015 growth forecast for beleaguered Greece, while upgrading its growth outlook for the broader euro zone economy.

The commission cut its forecast for Greek gross domestic product (GDP) in 2015 to just 0.5 percent from a previous estimate of 2.5 percent amid political turmoil.

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"Positive momentum has…been hurt by uncertainty since the announcement of snap elections in December," the European Commission said in its Spring report. Greek voters went to the polls in January, electing the left-wing anti-austerity Syriza party to power.

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"The current lack of clarity on the policy stance of the government vis-à-vis the country's policy commitments in the context of the EU/IMF support arrangements worsens uncertainty further," said the European Commission, which is the executive arm of the European Union.

Greece, which is weeks away from running out of cash, is in ongoing bailout talks with its creditors that have stalled on the issue of reforms.

An agreement with lenders on reforms could see Greece receive a vital last tranche of bailout aid worth 7.2 billion euros ($8.0 billion) that Athens needs to make loan repayments to the International Monetary Fund (IMF) and European Central Bank (ECB) in the next few months.

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Despite the stalemate, the Commission said it expected Greece's economy to recover in 2016, with GDP growth forecast at 2.9 percent as investment rebounds on the back of hoped-for structural reforms.

Upbeat on euro zone

EU cuts Greek growth forecast
EU cuts Greek growth forecast   

The European Commission forecast the broader 19-member euro zone economy would expand 1.5 percent this year, up from a previous forecast of 1.3 percent, amid stronger economic data.

The euro zone economy, which has lagged behind other major economies in recent years, is gaining momentum thanks to three main factors.

Firstly, over the past year, oil prices have fallen 35 percent, putting more money into the pockets of consumers and businesses in the region, which is a net importer of oil.

The region's exporters meanwhile have received a competitive boost from a 20 percent decline in the euro's value against the dollar. Plus, the ECB has embarked on a 1 trillion euro ($1.10 trillion) asset-purchase program to stimulate growth.

Beware the impact of a Greek exit
Beware the impact of a Greek exit   

"One of the main factors working in the EU's favour is the price of oil, which remains exceptionally low, even after having bounced back since the winter," the European Commission said in its report.

"At the same time, the effective exchange rate of the euro has continued to fall, boosting firms' competitiveness and profit margins."

Among other good euro zone data, Spain's national statistics office said on Tuesday that the number of Spaniards registered as jobless fell 2.7 percent last month from March – the steepest fall in the month of April on record.

Data last week showed unemployment in Germany, Europe's biggest economy, fell in April to its lowest level in 24 years, while the euro zone emerged last month from four months of deflation.

"The good news is that the growth outlook for the euro zone as a whole has improved markedly of late - and looks all the more promising given the recent weakness of the U.S. economy," Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, told CNBC on Tuesday.

"The bad news is that the vulnerabilities and weaknesses in the euro zone remain the same: A persistent lack of growth in France and Italy, dangerously high levels of unemployment and public debt and an escalating Greek crisis with potentially dire consequences for the bloc as a whole," he said .

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