Greece outlook slashed as eurozone improves

The EU on Tuesday sharply slashed its growth outlook for Greece this year due to its ongoing battle with its international creditors, dampening an otherwise improved outlook for the eurozone.

The Greek economy slumped severely in the first three months of the year, the European Commission said in its Spring forecasts, cutting its overall 2015 growth outlook for Greece to 0.5 percent, a huge tumble from its earlier prediction of 2.5 percent.

The sharp downturn will heap pressure on the radical leftist government of Prime Minister Alexis Tsipras to reach a deal with its EU-IMF creditors, who are demanding radical reforms that Athens is so far refusing.

"In light of the persistent uncertainty, a downward revision has been unavoidable" for Greece, Pierre Moscovici, the EU's Economic Affairs Commissioner, told a news conference.

The EU predicted Greece would rebound strongly with 2.5 percent growth in 2016, but stressed that its predictions were based on the assumption that Athens would reach a deal with its creditors when the extension of its current international bailout runs out at the end of June.

Moscovici -- who was due to meet Greek finance minister Yanis Varoufakis in Brussels later Tuesday -- said he hoped for "strong progress" at a meeting of eurozone finance ministers on May 11.

Greece's debt, already the highest in the eurozone, would meanwhile soar to 180.2 percent of annual economic output this year, before falling slightly to 173.5 percent in 2016, the EU said.

- 'Brightest spring' -

For the rest of the eurozone, cheaper oil and a weak euro led the EU executive to predict that the currency bloc would grow 1.5 percent in 2015, better than the 1.3 percent predicted in February.

"The European economy is enjoying its brightest spring in several years, with the upturn supported by both external factors and policy measures that are beginning to bear fruit," said Moscovici, a former French finance minister.

"But more needs to be done to ensure this recovery is more than a seasonal phenomenon."

The Commission forecast that the currency bloc would avoid much feared deflation this year, with consumer prices rising an albeit low 0.1 percent in 2015, and then gaining momentum to 1.5 percent in 2016.

Deflation can be dangerous, risking to trigger a spiral of ever weaker demand, slowing the economy and pushing up unemployment.

The inflation data helps confirm that an unprecedented bout of monetary stimulus -- known as quantitative easing -- by the European Central Bank was taking effect despite the objections of powerful Germany.

Tsipras's government came to power in Greece in late January and has been at loggerheads with the EU and IMF ever since, holding up bailout cash and putting its economy on the brink of collapse.

Most worryingly, the EU predicted that the Greek public deficit would stand at 2.1 percent this year, instead of a 1.1 surplus predicted in February. Running a budget surplus is the key condition from the EU and IMF for the Greek bailout.

The EU data also said inflation in Greece had collapsed deep into deflationary territory, at negative 1.5 percent for 2015, down from negative 0.3 predicted three months ago.

- French deficit narrows -

In other countries, the deficit outlook for sluggish France improved, making Paris less likely to face embarrassing penalties for breaking EU rules on public spending.

The deficit in the EU's second biggest economy would hit a still high 3.8 percent of gross domestic product this year, but lower than the 4.1 percent predicted only three months ago.

EU rules set the deficit limit at three percent of an economy's 12-month national output, while public debt, the accumulation of yearly deficits, must not exceed 60 percent of GDP.

Both rules are frequently broken by a majority of member states.

The EU said the employment picture in the eurozone would also improve, but the with stark divisions within the bloc remaining.

Unemployment in the eurozone as a whole would drop from 11.6 percent in 2014, to 11.0 percent by the end of 2015 and 10.5 percent in 2016.

German unemployment in 2015 would sink to a low 4.6 percent while joblessness in Greece would still tower the eurozone at 25.6 percent.