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EU Commission cuts euro zone growth forecasts for 2014

The European Commission in Brussels, Belgium
77studio | Getty Images
The European Commission in Brussels, Belgium

Euro zone unemployment will remain near its record high for the next two years amid subdued economic growth, the European Commission said in its latest economic forecast.

In its autumn forecast, the Commission said it expected unemployment in the 17-country euro zone to remain around 12.2 percent until 2015, when it is forecast to fall to 11.8 percent. Official figures last week revealed that unemployment remained at 12.2 percent in September, signaling that the region's faltering economic recovery has yet to be felt in the job market.

The euro zone exited recession in the second quarter, with gross domestic product expanding by 0.3 percent from the first three months of the year. The data signaled the end of the longest contraction in continental Europe in over 40 years.

(Read more: Manufacturing improves amid euro zone recovery)

But the Commission said it still expected the euro zone's gross domestic product (GDP) to shrink this year - by 0.4 percent, before recovering to grow by 1.1 percent in 2014. This forecast marked a slight downward revision from its earlier prediction of 1.2 percent growth next year, as a result of weaker private demand and investment.

"There are increasing signs that the European economy has reached a turning point," said EU Economic and Monetary Affairs Commissioner Olli Rehn in a statement.

"The fiscal consolidation and structural reforms undertaken in Europe have created the basis for recovery."

But Nicholas Spiro, managing director at Spiro Sovereign Strategy, said the autumn forecast makes "patently clear" that Europe's emergence from recession has yet to run its course.

"While the euro zone may have technically emerged from a recession in the second quarter of this year, it's still knee-deep in a protracted economic downturn with scant prospect of meaningful growth any time soon," he said in a note.

"The Commission's downward revision to its GDP forecasts for 2014 show how brittle the underpinnings of the euro zone's so-called 'recovery' are."

(Read more: Pressure on ECB to cut rates after inflation shock)

The autumn economic forecast also revealed that the annual inflation rate in the 17-country bloc is expected to remain low, at 1.5 percent this year before dropping to 1.4 percent in 2015 - significantly below the European Central Bank's target of just below 2 percent.

Last week, surprisingly low inflation data for the euro zone sparked concerns that the 17-country euro zone is heading for a period of deflation. HICP (Harmonised Index of Consumer Prices) inflation fell to a near-four-year low of 0.7 percent in October, year-on-year.

While on Tuesday, producer prices for the euro zone in September were also weak, up just 0.1 percent on the month as a result of higher energy prices, and down 0.9 percent year-on-year.

These figures - combined with Tuesday's economic forecast - are likely to boost the number of economists expecting the European Central Bank (ECB) to cut interest rates when it meets on Thursday.

At previous monetary policy meetings, ECB President Mario Draghi has repeatedly said that interest rates would remain at present or lower levels for an extended period of time. The central bank's main interest rate is currently at a record low of 0.5 percent.

"Muted producer prices in September - following on from consumer price inflation falling sharply to a 47-month low of just 0.7 percent in October – maintain pressure on the ECB to cut interest rates from 0.50 percent to 0.25 percent, and to act as soon as its November policy meeting on Thursday," Howard Archer, chief U.K. and European economist said in a statement on Tuesday.

"While it seems unlikely that an interest rate cut to 0.25% would have a major impact in boosting euro zone growth, it may at least help keep the euro at a more competitive level and limit market interest rates."

EU accounts

(Read more: Budget tensions flare up in Europe)

Meanwhile, the independent European Court of Auditors (ECA) published its annual report on the EU budget for 2012 on Tuesday.

It signed off the accounts, but stressed that "errors persist in all of the main spending areas." The error rate for spending from the EU budget as a whole increased again to 4.8 percent for the 2012 financial year - up from 3.9 percent in 2011. The estimated error rate has increased every year since 2009.

"Europe's citizens have a right to know what their money is being spent on and whether it is being used properly," ECA President Vítor Caldeira said in a statement.
"They also have a right to know whether it is delivering value, particularly at a time when there is such pressure on public finances."

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google

Contact World Economy

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