BRUSSELS--Low oil prices and easy money will boost European growth this year more than previously expected, the European Union said Thursday, but it cautioned that a slowdown in emerging economies and increased global uncertainty could damp the economy's positive momentum. In its forecasts, the European Commission, the EU's executive arm said that while cheaper oil and easy monetary policy by the European Central Bank have boosted consumption and exports, the pace of growth across the 28-country bloc and the euro area remains relatively muted. The commission warned that the scars of Europe's financial crisis--such as high government and corporate debt burdens and a weak global economy--would still weigh on growth for the next few years. "Given the fading impetus from tailwinds, the continued drag from legacies of the crisis, such as deleveraging pressures and weaknesses in banking sectors in some member states, and the weaker global economy, growth in 2016 and 2017 is set to remain modest," said Marco Buti, the bloc's chief economist. Economists at the commission forecast that gross domestic product in the 19-nation eurozone would grow 1.6%, up from their previous estimate in May of 1.5%. They predicted growth of 1.9% in the 28-nation EU, up from 1.8% in May. However, the commission slightly trimmed its forecasts for next year, seeing eurozone growth at 1.8%, down from the 1.9% it forecast in May and EU growth at 2%, down from the previously forecast 2.1%. Despite its cautious outlook for the next couple of years, the commission said that credit constraints are "clearly receding" and market funding will continue to play an increasing role in supporting investment, which should start becoming a stronger driver of growth. The commission's economists said that progress in overcoming crisis legacies, such as high levels of bad loans and high unemployment, should help boost growth but they cautioned that structural reforms in the eurozone haven't been enough to significantly increase growth potential. Meanwhile, the economists also examined the impact of the EU's deepening refugee crisis, concluding that the increased inflow of asylum seekers into the EU should result in additional government spending in several countries, boosting demand. "The analysis shows that, if managed properly, the inflow of refugees will have a small favorable effect on growth in the short and medium term. This will crucially depend on policies to integrate accepted refugees in the labor market," Mr. Buti said. The commission's forecasts included the first assessment of the Greek economy following the imposition of capital controls in June and the agreement struck in August between Athens and its international creditors on a new three-year bailout worth up to EUR86 billion ($93.4 billion) in exchange for tough economic overhauls and budget cuts. Greece is now expected to be in recession for this year and next, with GDP contracting by 1.4% and 1.3%, respectively. The commission's previous forecasts in May had expected Greece to grow 0.5% in 2015 and 2.9% in 2016. The thrice-yearly official forecasts serve as the foundation for budget negotiations between EU authorities in Brussels and the bloc's governments. The EU introduced new and stricter fiscal rules in 2013 to prevent a repeat of the sovereign-debt crisis. They allow Brussels to review budgets before they are submitted to national parliaments and to ask for changes in their spending plans.

Source