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EU, UK growth but Ukraine crisis threatens recovery
May 5, 2014, 9:46 pm

G7 sanctions on Russia are likely to impede growth across Europe and particularly curb Germany's recovery, analysts warn [AP]

G7 sanctions on Russia are likely to impede growth across Europe and particularly curb Germany’s recovery, analysts warn [AP]

The UK economy is expected to continue to show robust growth over the course of the next two years, an European Commission report said on Monday.

The UK economy will grow at 2.7 and 2.5 per cent in 2014 and 2015, respectively, the report added, supporting the general trends outlined in the International Monetary Fund’s (IMF) revised World Economic Outlook (WEO) report just one month ago.

In the WEO, the IMF said that the UK economy would grow by 2.5 and 2.9 per cent, respectively.

The European Commission report also said that Germany’s economy is to rebound significantly from 0.4 per cent last year to 1.8 and 2 per cent in 2014 and 2015.

The average growth for the 28-nation bloc is 1.2 and 1.7, respectively.

But there are pitfalls – Germany’s economy is tied too closely to Russia’s and increasing sanctions on the latter are likely to hurt Europe’s recovery.

Some expert estimates hold that the impact of sanctions could subtract up to 1 per cent from Germany’s GDP growth.

Recovery prospects are also impacted by low inflation rates. Although, the European Commission has insisted that the risk of deflation is low, the European Central Bank has been more concerned.

Inflation stood at 1.2 per cent in 2013, fell to 1 per cent forecast for 2014 and is expected to fall even further to 0.8 per cent in 2015 – far below the 2 per cent level the ECB says creates better conditions for growth.

On April 3, The ECB held interest rates at 0.25 per cent, largely meeting analysts’ forecasts, but its president Mario Draghi sounded a cautionary note about very low inflation data throughout the 18-member eurozone.

The ECB has always said that its target inflation for the zone is 2 per cent. However, recent data has the average at 0.5 per cent, and the bank says that low inflation – or deflation – can postpone growth as consumers wait for bargain prices for goods and services.

Eventually, this leads to inadvertent stagnation. 

In a bid to spur growth, the ECB has enacted policies to keep inflation rates at around 2 per cent throughout the eurozone.

Source: Agencies