EU cuts 2016 eurozone growth forecast on China risks

The EU on Thursday cut its eurozone growth forecasts for this year, warning that the slowdown in China and Europe's biggest migrant crisis since World War II posed real risks.

For the 19-nation single currency area, still sluggishly recovering from the financial crisis and the near exit of Greece last year, the European Commission reduced its 2016 growth estimate to 1.7 percent from 1.8 percent.

"Risks to the economy are becoming more pronounced and new challenges are surfacing -- slower growth in China and other emerging market economies, weak global trade as well as geopolitical and policy-related uncertainty," the Commission said in its winter economic forecast.

It also warned that any suspension of the Schengen passport-free area as Europe struggles to curb the huge flow of refugees and migrants would cause further disruption.

The migration crisis, which saw more than one million people brave risky sea crossings to reach the continent last year, posed "major political challenges" which could easily undercut growth if not properly handled, it said.

"A more widespread suspension of Schengen and measures that endanger the achievements of the internal market could potentially have a disruptive impact on economic growth," it said.

Brussels has warned of a possible two-year reintroduction of border controls in the 26-country Schengen area -- effectively suspending free movement across the zone -- over Greece's failure to secure its borders amid the migration crisis.

Positives such as lower oil prices, cheap money and a weak euro which boosts exports may not be enough to keep the economy on track, the Commission said.
Falling prices may even be a hindrance since buyers put off purchases if they think they can get them cheaper later, and the forecasts put the eurozone perilously close to this deflation trap. 

The Commission said inflation was unchanged in 2015, coming in below even its forecast for a marginal gain of 0.1 percent.

Worse still, it slashed its inflation estimate for this year to 0.5 percent from 1.0 percent, before it picks up to 1.5 percent in 2017.

The European Central Bank's inflation target is around 2.0 percent, highlighting the scale of the problem. 

The eurozone has recovered painfully slowly from the 2007-08 global financial crash which brought the single currency area to its knees, with the ECB forced to launch a more than one-trillion-euro stimulus programme to bolster growth.

In 2015, the eurozone grew 1.6 percent, so the 1.7 percent forecast for this year represents marginal progress at best, although the Commission expects it to pick up to 1.9 percent next year, unchanged from its previous forecast.