Autumn forecast 2009-2011: EU economy on the road to a gradual recovery

Scofflaw

European Commission Autumn forecast for the whole EU:

The Commission's autumn forecast projects that the EU economy 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%.

A gradual recovery is expected with GDP forecast to grow by .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 JoaquÃ*n 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 are now back at 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.

A gradual recovery ahead

The improved near-term outlook in the EU and abroad is partly the result of temporary factors. As the impact of these fade in the course of 2010, global activity is likely to go through a soft patch. EU export growth is therefore expected to firm only gradually over the forecast horizon. Domestic demand also faces a number of constraints going forward.

Reflecting low capacity utilisation, relatively weak demand prospects, subdued profitability gains and still moderating credit growth, investment is not projected to recover until 2011. Although private consumption proved to be a stabilising factor during the recession, spending in the period ahead is set to be held back by the need for deleveraging of households' balance sheets and weak labour-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 is forecast to ease somewhat before regaining ground in the second half of 2010 and beyond.

Labour market and public finances under pressure

While the EU labour market has been more resilient to the recession than expected (largely on account of short-term policy measures, past reforms and labour hoarding in some Member States), an increase in labour shedding is expected in the coming quarters. A contraction in employment of around 2.25% is foreseen this year, with a further decline of about 1.25% expected in 2010. A gradual stabilisation in employment is likely towards the end of 2010 and into 2011 as the recovery takes hold.

Public finances have also been hit hard. The government deficit is projected to triple this year in the EU (reaching close to 7% of GDP, up from 2.25% in 2008) and to rise further in 2010 to around 7.5%. This deterioration follows in part from the working of automatic stabilisers and the discretionary measures taken to support the economy, but also reflects a stronger than usual fall in revenue in response to the downturn. A slight easing in the deficit, to just below 7% 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.

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.

See tables below and full forecast document at:
http://ec.europa.eu/economy_finance/thematic_articles/article16051_en.htm

I'd say, on balance, that that looks like good news for Ireland, given that the EU is the major export market for both domestic and multinationals. Further, if inflation remains subdued, then ECB rates won't be shooting up.

cordially,
Scofflaw

gurramok

Wait until 2011 for a bit of growth in Ireland.
http://www.irishtimes.com/newspaper/breaking/2009/1103/breaking38.htm

IT wrote:

he EC estimates that Irish GDP will drop by 7.5 per cent this year, however, and it expects the economy to contract by 1.4 per cent next year before posting 2.6 per cent growth in 2011.

Deficits next year will amount to 14.7 per cent of gross domestic product in Ireland, 10.1 per cent of GDP in Spain, 8.2 per cent in France and 5 per cent in Germany, the region’s largest economy, the commission said.

http://www.rte.ie/business/2009/1103/eurozone.html

RTE wrote:

For Ireland, the commission forecast that GDP would fall by 7.5% this year, less dramatic than the 9% drop in expected in its previous forecast in May. It said the economy would shrink by another 1.4% next year, before recording 2.6% growth in 2011.

The commission forecast that unemployment here would peak at 14% next year. It also said the debt ratio would climb to 96% of GDP by 2011.

Have they factored in the forthcoming budget adjustments, that 4bn cutback per year thing?