By Martin Santa
BRUSSELS (Reuters) - The risk of deflation in the euro zone is very low, the European Commission said on Monday, but price growth will pick up more slowly than expected this year and next, partly because of a stronger euro and a weak recovery.
Annual consumer inflation in the 9.5 trillion economy is to slow to 0.8 percent this year from 1.3 percent in 2013, staying well below the European Central Bank's target of close to, but below 2 percent even in 2015 with 1.2 percent.
The new projection is lower than the February forecast when it saw inflation at 1.0 percent this year and 1.3 percent next year.
Consumer prices in the 18 countries sharing the euro are rising at only a very moderate pace because of record-high unemployment, government spending cuts and tight credit, as banks remain reluctant to lend to businesses.
"Inflation could turn out lower than envisaged in the central scenario if labour market conditions and commodity prices turn out weaker than expected," the European Commission's forecast said.
"However, the probability of outright deflation, defined as a generalised and self-enforcing fall in prices in the euro area as a whole, remains very low," it added.
Economists polled by Reuters expected no change in the ECB's monetary policy after the central bank meets on rates this Thursday. Roughly half of them expected some form of stimulus in the future, be it a rate cut or outright buying of assets.
Because inflation is so far below its target, the ECB has opened the door to money printing via the so-called "quantitative easing" (QE) to support the economy, which is growing at a slower rate than much of the rest of the world.
The euro zone economic recovery, strongly export-driven with gradually firming domestic demand, should produce 1.2 percent growth this year after a 0.4 percent fall in 2013, the Commission said.
Growth is to accelerate to 1.7 percent next year as domestic demand picks up, marginally slower than the 1.8 percent the Commission forecast for 2015 in February.
"Domestic demand is expected to become the key driver of growth over the forecast horizon. Consumer spending should progressively add to growth as real income benefits from lower inflation and the stabilising labour market," the Commission said.
Inflationary pressures in the euro zone have increased marginally but remain subdued, it said.
In a separate data release, the EU's statistics office Eurostat said that producer prices, a proxy for consumer inflation, fell as expected 0.2 percent on the month in March, putting the annual producer price inflation reading at -1.6 percent.
(Reporting by Martin Santa)