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Official forecast: EU's GDP set to fall 4% in 2009

Updated:2009-11-04 11:11:34

The European Union economy is set to fall by 4 percent in 2009 but would grow by 0.75 percent in 2010 and 1.5 percent in 2011, the European Commission (EC) said Tuesday in its autumn forecast for 2009-2011.

The EC report said Europe experienced the deepest, longest and most broad-based recession in history during the first half of 2009 due to the global financial crisis.

"A contraction in employment of around 2.25 percent is foreseen this year, with a further decline of about 1.25 percent expected in 2010 ... the unemployment rate is projected to reach 10.25 percent in the EU," the report said.

"A gradual stabilization in employment is likely towards the end of 2010 and into 2011 as the recovery takes hold," it added.

Public finances have also been hit hard.

The government deficit was projected to triple this year in the EU, reaching close to 7 percent of GDP, up from 2.25 percent in 2008. The deficit will rise further in 2010 to around 7.5 percent of GDP, the report predicted.

The deterioration follows in part from the working of automatic stabilizers and discretionary measures taken to support the economy, but also reflects a stronger than usual fall in revenue in response to the downturn, the report said.

A slight easing in the deficit, to just below seven percent of GDP, "is expected in 2011 as activity picks up and temporary measures come to an end. However, the debt ratio is set to remain on an increasing path."

However, recent months have seen a marked improvement in the economic situation and financial conditions in the world, the report said, citing several financial indicators that are now back at pre-crisis levels.

"On the basis of these developments, together with a favorable inventory adjustment, GDP growth in the EU and euro area is set to turn positive again in the second half of this year," the report said.

As the impact of the "unprecedented fiscal and monetary policy actions" fades in the course of 2010, "global activity is likely to go through a soft patch," it said.

"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," Joaquin Almunia, Commissioner for Economic and Monetary Affairs, said upon releasing the report.

The forecast projected that the economies of the 27-nation European Union and of the 16-nation euro zone were "on the road to a gradual recovery" and "will emerge from recession in the second half of this year, although for 2009 as a whole, GDP is still set to fall by some 4 percent."

"A gradual recovery is expected with GDP forecast to grow by 0.75 percent in 2010 and around 1.5 percent in 2011," the report said.

It said that the near-term rebound in activity follows improvements in the external environment and financial conditions, as well as from significant fiscal and monetary policy measures.

"However, the road ahead is a challenging one," Almunia.

He said that to maintain momentum and support the sustainability of the recovery, it is essential to "fully implement all announced measures and complete the repair of the banking sector."

Alumnia urged the EU to begin to look more toward the medium-term, and consider how best to address the adverse effects that the crisis has had on labor markets, public finances and potential growth.

Domestic demand still faces a number of constraints going forward. Reflecting low capacity utilization, relatively weak demand prospects, subdued profitability gains and still moderating credit growth, investment is not projected to recover until 2011, said the report.

Private consumption proved to be "a stabilizing factor during the recession," and spending in the period ahead is set to be held back by the need for deleveraging of households' balance sheets and weak labor-market prospects."

A further restraining factor is the estimated adverse impact of the financial crisis on potential output. Thus, following an initial upturn, GDP growth in the EU and euro area was forecast to ease somewhat before regaining ground in the second half of 2010 and beyond.

Inflation in the EU and euro area was expected to rebound somewhat from its current low level, but would remain subdued over the forecast horizon.

"HICP inflation is projected to average slightly over one percent in 2010 and around 1.5 percent in 2011 in both areas," the report said.

While rising commodity prices were likely to put upward pressure on inflation, substantial slack in the economy and weak wage growth should have a dampening effect, the forecast said.

"The outlook for the EU economy as it emerges from recession is highly uncertain, and subject to non-negligible but broadly balanced risks," warned the report.

"The recovery," the report said, "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 labor-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, the report warned.



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