Brussels, 04/05/2009 (Agence Europe) - In the European Commission's spring forecast, published on Monday 4 May, GDP in the European Union will shrink by 4% this year in both the euro area and the EU as a whole. This is far greater than was predicted in January, when the Commission forecast a drop of 1.9% in the euro area and 1.8% in the EU27 (see EUROPE 9821). While the diagnosis is largely the same as in the previous forecast, the scale of the recession has worsened, affecting the recovery scenario. At the start of the year, the Commission was hoping for a return to growth in 2010 (+0/4% in the euro area and +0.5% in the EU27), but this latest forecast expects growth to continue to be slightly negative
(-0.1% in both areas). “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,” commented Economic and Financial Affairs Commissioner Joaquin Almunia, presenting the forecast to press. This “cautious” forecast would have been at least 1% worse had it not been for the steps taken virtually everywhere to tackle the crisis, he said.
A very deep world recession… Having first affected the economies heavily dependent on the housing sector, the crisis then spread to those dependent on exports before hitting the emerging economies (as a result of falling foreign direct investment). The collapse of trade, which will cause world GDP to shrink by 1.5% in 2009 was particularly marked at the turn of the year, with a considerable fall in industrial output and investment. Still difficult finance conditions and the low confidence of economic players will continue to affect world activities, but their effect should in part by counterbalanced by the recovery measures and by sustained private consumption (thanks to the lower cost of energy and low inflation). World growth is likely to be positive in 2010 (almost +2%). Japan, which will see a recession of 5.3% this year, and the United States, recording a 2.9% reduction in GDP, will both move back into positive growth next year (+0.1% and +0.9% respectively). In Europe, the last quarter of 2008 and the first three months of this year have been the worst, Almunia said, opining that things were close to bottoming out in the EU. It was likely gradually to come out of the crisis with differences between member states in 2010. “The forecast is not rosy but, for the first time since mid-2007, we are seeing light at the end of the tunnel,” he said, predicting that the economy would stabilise in the second half of the year and gradually begin to recover, though gently, next year.
… which affects all EU member states. Although to very differing degrees, EU member states as a whole have been affected by the current recession (only Cyprus is likely to maintain positive growth in 2009 and 2010). Among those with the largest falls in 2009 feature the Baltic states, with -13.1% in Latvia, -11% in Lithuania and -10.3% in Estonia. Then comes Ireland with -9%, followed by Hungary
(-6.3%) and Germany (-5.4%). The other main EU economies are expected to contract: by 4.4% in Italy, 3.8% in the United Kingdom, 3.5% in the Netherlands, 3.2% in Spain, 3% in France and 1.4% in Poland. Assuming policies remain unchanged, many member states will probably see their GDP shrink in 2010. The fall is likely to be most pronounced in Latvia (-4.7%), Lithuania (-3.2%), Ireland (-2.6%) and Spain
(-1%). Some economies are likely to recover: this is particularly so for Sweden and Poland (+0.8% each), Slovenia, Slovakia and Cyprus (+0.7%), and also Germany, Denmark and the Czech Republic (+0.3%). At this point, it is still too soon to tell if additional recovery measures will be necessary, Almunia said. He will be able to take closer stock of the effect of current measures between now and the European Council of 18-19 June. If there have to be new steps, “it is absolutely clear that they have to be coordinated at European level before being adopted nationally,” he said, stressing that genuine prior coordination had been lacking in December. He noted that the room for budgetary manoeuvre was now much more restricted for most countries.
General worsening in public finances. Whether member states' budgetary support serves to kick-start the European economy (by means of discretionary measures to promote consumption and income) or simply to meet the increase in spending related to rises in unemployment (through the use of automatic stabilisers), these measures will weigh heavy on public finances in 2009 and 2010. The ratio of public debt to GDP will go from 61.5% in the EU and 69.3% euro area in 2008 to 72.6% and 77.7% respectively in 2009. The EU27 public deficit ratio is likely to more than double this year, to 6% of GDP (compared with 2.3% in 2008). In the euro area, the situation is similar, with 5.3% of GDP this year, compared with 1/9% last. This trend will continue in 2010, with levels of 7.3% and 6.5% of GDP respectively being reached. No member states will have a positive budgetary balance and there will only be six not in a situation of excessive deficit this year (Cyprus, Luxembourg, Finland, Bulgaria, Denmark and Sweden - Estonia being just 3%). While six countries are already concerned by excessive deficit procedures (Ireland, Spain, France and Greece and earlier United Kingdom and Hungary), the Commission will begin new procedures against five other countries which have known a deficit of over 3% in 2008 and will remain over the threshold in 2009. Commissioner Almunia has announced that he will soon be presenting reports with a view to noting the existence of excessive deficit (Article 104§3 of the Treaty) in Poland (-3.9% in 2008 and -6.6% in 2009), Romania (-5.1% and -5.6%), Lithuania (-3.2% and -5.4%) and Malta (-4.7% and -3.6%). Latvia (-4% and 11.1%), for which a report has already been drafted (EUROPE 9843), will be directly concerned by the next stage of the procedure (Article 104§5, 6 and 7). The other countries presenting excessive deficits in 2009, but which respected the Stability and Growth Pact limit in 2008, are spared for now.
Labour market hit hard. European labour markets will not escape the slowdown. Employment is expected to contract by 2.5% in 2009 and by 1.5% in 2010, in both the eurozone and the EU27. There will be about 8.5 million job losses over two years (compared to net job creations of 9.5 million between 2006 and 2008). In 2009, the rate of unemployment will be 9.9% in the eurozone and 9.4% in the EU27 (compared to 7.5% and 7% respectively in 2008). In 2010, this will rise to 11.5% and 10.9%, a substantial revision of forecasts compared to the last financial year. The deterioration will hit all member states, the most heavily hit being those affected by a substantial fall in construction activity (Estonia, Ireland, Latvia, Lithuania and Spain).
Inflation very low, temporarily. The level of inflation has fallen sharply in recent months and is projected to continue to do so during the second and third quarters of this year, before gradually moving up again next year. In 2009, the general rise in the level of prices is expected to amount to 0.4% in the eurozone and 0.9% in the EU27 (compared to 3.3% and 3.7% in 2008). In 2010, the rate of inflation will be 1.2% and 1.3% respectively. Mr Almunia said: “We do not think there will be serious risk of deflation in the eurozone and the EU27”. (A.B./transl.rt.jl)