Euroframe, a group of Europe's ten leading economic think-tanks, including Ireland's ESRI (Economic and Social Research Institute), say in its Winter 2009 report on the Eurozone, that GDP (gross domestic product) will increase by +1.0% in 2010 and +2.0% in 2011. It expects the ECB will raise its benchmark interest rate to above 2% by the end of 2011.
Euroframe says there are several reasons for the forecast of a relatively modest upturn.
The report says that the current pickup in economic activity has been triggered in part by fiscal stimulus which will not be continued over an extended period of time, given huge public deficits adding to already high levels of debt in many countries. While the attitude of governments on when they will switch towards fiscal consolidation currently differs across countries, the fiscal stance will be close to neutral in 2010 in the Eurozone as a whole and will be significantly tightened in 2011, together with a gradual removal of extraordinary monetary stimulus.
The think-tanks say that unemployment will continue to rise well into 2010 and stay on a high level afterwards. The weakness in the labour market, in combination with credit constraints and the desire of households to restore their balance sheets in a number of countries that have experienced the bursting of a house price bubble, should limit the annual rate of expansion of private consumption to below 1%. Fixed investment is expected to start rising again in the course of next year, but given extremely low rates of capacity utilisation, investment will largely be confined to replacing old capital stock rather than increasing capacities.
Finally, the banking sector remains distressed in a number of countries and there is a danger that credit supply will be reduced further in response to the substantial writedowns on nonperforming loans that can be expected to be necessary over the next couple of years as a fallout from the crisis, especially in countries with low levels of bank capital such as Germany. All in all, after a steep decline of close to 4 % in 2009, the economists expect real GDP in the Eurozone to rise by 1 % next year and 2 % in 2011. These rates are still below or close to the rate of potential output growth usually estimated before the financial crisis and they will leave the real GDP level well below the pre-crisis level in 2011.
Given the moderate outlook for inflation, the economists say that the ECB (European Central Bank) is expected to keep the main refinancing rate at 1% for the remainder of this year, but to raise it slowly in the course of 2010 and 2011 in line with the forecast recovery. They anticipate the ECB will raise the main refinancing rate to above 2% by the end of 2011.
Euroframe comprises: CASE (Poland), CPB (Netherlands), DIW Berlin (Germany), ESRI (Ireland), ETLA (Finland), The Kiel Institute for the World Economy (Germany), NIESR (United Kingdom), OFCE (France), PROMETEIA (Italy) and WIFO (Austria)
