The European Commission said in its autumn forecast today that the Eurozone will return to gradual growth in 2010 and it raised its forecasts as budget deficits and unemployment rise to the highest levels since at least 1995. The commission said Ireland will not achieve full-year growth until 2011 when the Irish debt/GDP (gross national product) ratio will rise to 96%.

The commission said the economy of the 16 member country currency area, will expand 0.7% in 2010 and 1.5% in 2011, after contracting 4 percent this year. It had previously forecast a 0.1% contraction in 2010. The region’s average deficit will jump to 6.9% of GDP in 2010 and unemployment will reach 10.9% in 2011, the most since at least 1995.

The Euro Growth and Stability Pact provides for a deficit ceiling of 3% of GDP.

EU autumn forecasts

In Ireland, GDP is forecast to fall by 7.5% this year, compared with 9% in the commission's previous forecast; Irish GDP will shrink 1.4% next year and growth will resume at a 2.6% rate in 2011.

Today's report says the Irish recession continues to be driven by domestic demand. In particular, the strong fall in employment and incipient nominal wage declines are taking their toll on household disposable income, despite the fall in domestic prices and the increase in social transfers. Together with a significant rise in precautionary savings, influenced by households' negative employment expectations, this is projected to lead in 2009 to the strongest decline in real private consumption expenditure in over 25 years.

The report also says driven exclusively by the good performance of the - - relatively countercyclical - - chemical and pharmaceutical goods sector, Ireland's exports have held up remarkably well in the crisis and are only expected to record a fairly moderate decline in 2009 - - the smallest in the Eurozone. The commission says they should expand again in the following years. At the same time, the strong declines in private consumption and investment expected in 2009 should translate into a marked fall in imports, implying a strong positive contribution of external trade to GDP growth. The contribution of net  exports should be smaller but stay positive in the remaining years of the forecast horizon, thereby contributing to the gradual narrowing of the current account deficit.

The commission says regaining competitiveness will be important given that balance sheet adjustments should continue to weigh on domestic demand over the next years. The projected increase in households' savings rate reflects not only precautionary motives but also the need to reduce indebtedness, after household debt as a share in GDP had doubled between 2001 and 2007 in the context of the housing boom.

The commission forecasts that unemployment in Ireland will peak at 14% next year and a combination of the large primary deficits, rising interest expenditure and, until 2010, falling nominal GDP, should lead to a rise in the debt ratio to around 96% of GDP by 2011.

The commission also said a gradual recovery is expected with EU27 GDP forecast to grow by 0.75% in 2010 and around 1.5% in 2011.

" 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.

A gradual recovery ahead

The commission said 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 EU27 and Eurozone  is forecast to ease somewhat before regaining ground in the second half of 2010 and beyond.