EU Economy Forecast to Shrink 4% This Year

The economies of the European Union (EU) and the euro zone are both set to shrink by 4 percent this year and by a further 0.1 percent in 2010, the European Commission said on Monday.

The European economy is in the midst of its deepest and most widespread recession in the post-war era, said Joaquin Almunia, EU commissioner for economic and monetary affairs.

It was sharply revised down from a January estimate, which forecast a contraction of 1.8 percent for the EU and 1.9 percent for the euro zone this year before positive growth for both areas next year.

The main factors behind the recession are the worsening of the global financial crisis, a sharp contraction in world trade and ongoing housing market corrections in some member states, the commission said.

The downswing is affecting not only all EU member states but also almost all demand components.

Private investment is particularly hit, reflecting depressed demand expectations, a sharp fall in capacity utilization and still tight financing conditions.

Similarly, exports have contracted sharply in light of the marked drop in world trade. While private consumption is still holding up relatively well, helped by lower oil prices and lower inflation, real disposable income is likely to be dampened by a progressive deterioration in the labor market.

Only government consumption and public investment will contribute positively to growth this year, thanks partly to the budgetary stimulus measures taken by the EU and member states.

Due to a weak economic outlook and an assumed decline in commodity prices, inflation in both the EU and the euro zone has fallen sharply in recent months and is projected to continue to do so during the second and third quarter of this year.

For the whole year of 2009, inflation is projected to be slightly lower than 1 percent in the EU and 0.5 percent in the euro zone, and to reach a trough in the third quarter in both regions. It is expected to gradually pick up to about 1.25 percent next year, still well below the 2 percent ceiling preferred by the European Central Bank to maintain price stability.

But with the economies in a deeper recession, European labor markets are cooling. Employment is expected to contract by about 2.5 percent in both the EU and the euro zone this year and by a further 1.5 percent in 2010, resulting in about 8.5 million job losses for the two years, in contrast to the net job creation of 9.5 million from 2006 to 2008.

The unemployment rate is forecast to reach 10.9 percent in the EU in 2010 and 11.5 percent in the euro zone.

Despite the gloomy figures, the commission indicated that the European economy may have bottomed up and with the impact of fiscal and monetary stimulus measures kicking in, growth is expected to regain some momentum in the course of 2010.

The ambitious measures taken by governments and central banks in these exceptional circumstances are expected to put a floor under the fall in economic activity this year and enable a recovery next year, Almunia said.

As EU governments spent billions of euros on financial bailouts and fiscal stimulus, and tax revenue dwindled in the economic downturn, public finances are also being hit hard, with the budget deficit set to more than double this year in the EU from 2.3 percent of gross domestic product in 2008 to 6 percent and to increase further to 7.24 percent in 2010.

The commission warned that with the global economy facing its worst recession since World War II, the economic and inflation outlook is subject to considerable uncertainty.

The risk of a worse-than-expected outlook hinges in particular on the impact of the financial crisis and the strength of the feedback loops between different sectors of the economy, the commission said. 

Source: CRIEnglish