The European Commission’s (EC) autumn forecast projects that the EU economy will emerge from recession in the second half of this year, although for 2009 as a whole gross domestic product (GDP) is still set to fall by some 4%. A gradual recovery is expected with GDP forecast to grow by 0.75% in 2010 and around 1.5% in 2011. The near-term rebound in activity follows from improvements in the external environment and financial conditions, as well as from the significant fiscal and monetary policy measures put in place.
Further out, a number of factors are set to restrain private demand and thus, the strength of the recovery. In particular, labour-market conditions will remain weak, with the unemployment rate projected to reach 10.25% in the EU. The public deficit is also expected to rise, to 7.5% of GDP in 2010, before falling back slightly in 2011 as the economy picks up and temporary measures gradually come to an end.
“The EU economy is coming out of recession. This owes much to the ambitious measures taken by governments, central banks and the EU that have not only prevented a systemic meltdown but have kick-started the recovery. However, the road ahead is a challenging one. To maintain momentum and support the sustainability of the recovery, it is essential that we fully implement all announced measures and complete the repair of the banking sector. We must also begin to look more towards the medium-term, and consider how best to address the adverse effects that the crisis has had on labour markets, public finances and potential growth,” said Joaquín Almunia, Commissioner for Economic and Monetary Affairs.
Having experienced the deepest, longest and most broad-based recession in its history, the EU economy has reached a turning point. Recent months have seen a marked improvement in the economic situation and financial conditions, largely due to the unprecedented fiscal and monetary policy actions that have been taken. Several financial indicators have returned to pre-crisis levels, while confidence is advancing. The outlook for global growth and trade has also strengthened, especially in emerging-market economies. On the basis of these developments, together with a favourable inventory adjustment, GDP growth in the EU and euro area is set to turn positive again in the second half of this year.
Inflation Remains Subdued
Inflation in the EU and euro area is expected to rebound somewhat from its current, very low level, but to remain subdued over the forecast horizon. HICP inflation is projected to average slightly over 1% in 2010 and around 1.5% in 2011 in both areas. While rising commodity prices are likely to put upward pressure on inflation, substantial slack in the economy and weak wage growth should have a dampening effect.
Uncertainty Remains High
The outlook for the EU economy as it emerges from recession is highly uncertain, and subject to non-negligible but broadly balanced risks. The recovery could surprise on the upside if policy measures are more effective than anticipated in restoring the soundness of the financial sector and boosting confidence, or if there is a more pronounced pick-up in global demand. On the other hand, the impact of weak labour-market conditions and constraints on investment could prove stronger than expected. Moreover, if the banking sector does not repair its balance sheet, it may not be able to provide sufficient support to the recovery. Risks to the inflation outlook are also broadly balanced.
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