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Euro zone deflation risks low: European Commission

EU has many reforms left to do: Pro

The risk of deflation in the euro zone is low, the European Union's executive arm said on Monday, despite warning that inflation is expected to slow this year.

In its Spring Economic Forecast, the European Commission said inflation in the 18-member bloc would fall to 0.8 percent in 2014 from 1.3 percent last year.

It added that inflation was expected to pick up in 2015 to 1.2 percent - but this remains well below the European Central Bank's (ECB) target of close to 2 percent.

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"The risk of outright deflation, defined as a generalized and self-reinforcing fall in prices in the euro area as a whole, remains low," the Commission said.

"For such a scenario to materialize, inflation would have to drop sharply to almost zero in the core countries of the euro area. Shocks that would trigger such a drop in core inflation are very unlikely."

It comes amid wide-spread fears of deflationary pressures in the euro zone, with a number of analysts calling on the ECB to use policy tools such as quantitative easing to combat persistently low inflation.

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Official data released last week revealed that consumer prices rose by 0.7 percent year-on-year in April, although this rise was below expectations.

Growth forecasts

The European Commission said it expects the euro zone economy to grow by 1.2 percent in 2014, as the recovery takes hold. But it cut its growth forecasts for the region for 2015, from 1.8 percent to 1.7 percent.

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The European Union as a whole is expected to grow 1.6 percent this year, up from the previous forecast of 1.5 percent. In 2015, the Commission expects the 28-nation bloc to grow by 2.0 percent.

"The recovery has now taken hold. Deficits have declined, investment is rebounding and, importantly, the employment situation has started improving. Continued reform efforts by Member States and the EU itself are paying off," Commission Vice President Siim Kallas said in a statement.

Country breakdown

Some of the countries worst hit by the euro zone debt crisis are also expected to see a turnaround in their economic fortunes.

Greece and Spain's economies will expand by 0.6 percent and 1.1 percent respectively in 2014 after contracting last year, the Commission said. While Portugal's gross domestic product (GDP) will hit 1.2 percent this year as it, too, returns to growth.

The Commission also upgraded the U.K.'s outlook for 2014 and 2015, with GDP forecast to come in at 2.7 percent next year, outstripping Germany's expected 1.8 percent growth.

Unemployment to fall

The euro zone's joblessness crisis is also seen improving - albeit very gradually - with the rate of unemployment expected to fall from 12 percent last year to 11.4 percent in 2015.

While Greece and Spain - both of which are struggling with a crippling number of people out of work - are expected to see their jobless rates fall to 24 percent next year.

But analysts have struck a note of caution over their outlook for the euro zone economy.

"I think the foundations are really the key because there still is reform that has to be done, there still are some long-term budget issues," John Silvia, chief economist at Wells Fargo Securities told CNBC in a TV interview.