EC Predicts a Tough 2009, but EU Economy Should Stabilise in 2010

In the European Commission’s (EC) spring forecast, gross domestic product (GDP) in the European Union (EU) is projected to fall by 4% this year and to broadly stabilise in 2010. 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 economies. However, with the impact of fiscal and monetary stimulus measures kicking in, growth is expected to regain some momentum in the course of 2010.

Labour markets will be severely affected, with the unemployment rate expected to increase to 11% in the EU in 2010. The public deficit is also projected to rise sharply, to 7.25% of GDP in 2010, reflecting both the slowdown and the discretionary measures taken to support the economy, in line with the European Recovery Plan proposed by the EC.

“The European economy is in the midst of its deepest and most widespread recession in the post-war era. But 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. For this to happen we need to proceed rapidly with the cleaning up of the ‘impaired assets’ on bank balance sheets and recapitalise banks when appropriate”, said Joaquín Almunia, Commissioner for Economic and Monetary Affairs.

The recession that started in the second quarter of 2008 worsened towards the end of the year, with both the EU’s and the euro area’s GDP declining by about 1.5% (quarter-on-quarter) in the last quarter. Survey and hard data suggest a further deterioration in the first quarter of this year. All Member States are affected by the downturn, although their prospects vary depending on their relative exposure to the financial crisis, housing-market dynamics and degree of openness.

As financial markets stabilise, investor confidence improves and both fiscal support and monetary easing gradually feeds through to real activity, the fall in GDP is set to level off towards the end of this year and growth rates should turn modestly positive during 2010.

Inflation has fallen sharply in recent months and is projected to continue to do so during the second and third quarter of this year, due to further base effects, a weak economic outlook and an assumed decline in commodity prices. Overall, harmonised index of consumer prices (HICP) inflation is projected to be slightly lower than 1% in the EU (and 0.5% in the euro area) in 2009, and to reach a trough in the third quarter in both regions. As base effects of past hikes in energy and food prices drop out of the annual rate this autumn, HICP inflation is expected to gradually pick up to about 1.25% next year.


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