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News : EU Economy Last Updated: Nov 29, 2010 - 11:41:32 PM

EU recovery taking hold; Eurozone 2010 growth forecast almost doubled; Ireland to grow by only 0.9% in 2011
By Finfacts Team
Nov 29, 2010 - 1:56:36 PM

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The EU27 includes Belgium (BE), Bulgaria (BG), the Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France (FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK).

The European Commission said today that the EU recovery is taking hold but progress in uneven and despite the Irish debt crisis, it has almost doubled the forecast for Eurozone growth in 2010. The Irish economy will grow by just 0.9% next year.

In its autumn forecast, the Commission said Eurozone economic growth this year would likely be 1.7%, nearly double its spring forecast of 0.9%. However, growth is expected to moderate next year to 1.5% as the withdrawal of stimulus measures and a slowing of the global recovery impact demand. Economic activity s expected to pick up again in 2012 to 1.8% as the private sector begins to take up the slack from the public sector's retrenchment.

The Irish economy will grow by just 0.9% next year compared with a target of 1.75% of GDP in the Government's four-year plan which was published last week.

The Commission is predicting a growth rate of 1.9% for 2012, compared with the Government's projection of 3.25%. The peak year will be 2012, where the Department of Finance sees growth of 3.2%, falling back to 2.75% in 2014.

Growth in Germany will slow in 2011 from 3.7% this year to 2.2%. France, Europe's second largest economy is expected grow by 1.6% this year and next while the UK economy will grow more than previously forecast in 2011 as exports improve, the European Commission said.

Gross domestic product will increase 2.2% in 2011, compared with a May forecast of 2.1%. Growth this year will be 1.8%, more than its interim estimate in September of 1.7%.

With the economic recovery taking hold in the EU, labour-market conditions are expected to slowly improve over the forecast horizon, as is the budgetary situation. The unemployment rate is projected to fall to around 9% in 2012, with the public deficit declining to about 4¼% of GDP. Developments across member states are nevertheless set to remain uneven.

European Commissioner for Economic and Monetary Affairs, Olli Rehn said:"The economic recovery has taken hold. I am encouraged by the prospect that employment is finally set to improve next year in Europe. Public deficits are starting to decline thanks to the consolidation measures taken and to the resumption of growth. However, this recovery is uneven, and many member states are going through a difficult period of adjustment. A determined continuation of fiscal consolidation and frontloaded policies to enhance growth, are essential to set the sound basis for sustainable growth and jobs. The turbulence in sovereign debt markets underlines the need for robust policy action."

Broadly favourable developments so far

In line with the characteristics of previous recoveries following financial crises, the EC says the current upturn is proving rather muted overall. That said, the economic situation in the EU has significantly brightened of late, with GDP growth in 2010 so far exceeding expectations, especially in the second quarter. The recovery also appears to be broadening out. While export growth – the first stage of the traditional recovery pattern – has been solid for some time, the EU economy is now entering the next phase - whereby the pick-up in exports starts to spur (equipment) investment demand.

A gradual and uneven recovery

With the projected slowdown in global activity dampening export growth and temporary supports running their course, near-term prospects for the EU economy appear more subdued. The contribution of net exports to GDP growth is set to diminish over the forecast horizon; whereas the contribution of domestic demand is set to increase, owing to a gradual firming of investment and private consumption growth. On the investment front, improvements in the capacity utilisation rate and the profit situation of firms are among the factors expected to support growth, while ongoing balance-sheet adjustment and fiscal consolidation are set to act as constraints. As for private consumption, a slowly improving employment outlook, moderate income growth and subdued inflation underlie the projected pick-up, though consolidation and deleveraging on the part of households are set to have a dampening effect here too.

While the recovery is becoming increasingly self-sustaining at the aggregate level, progress across member states remains uneven, with the recovery set to continue advancing at a relatively fast pace in some, but to lag behind in others. This reflects differences in the scale of adjustment challenges across economies and ongoing rebalancing within the EU and Eurozone.

Labour-market conditions and public finances start to improve

Today's report says developments in the labour market typically lag those in GDP by half a year or more. In keeping with this pattern, recent months have seen labour-market conditions start to stabilise in the EU, with a modest improvement expected over the forecast horizon. Employment growth of almost ½% and around ¾% is expected in 2011 and 2012 respectively, while the unemployment rate is projected to gradually fall, from some 9½% this year to about 9% by 2012. Overall conditions are set to remain weak though, reflecting, inter alia, the unwinding of policy measures taken in response to the recession and ongoing structural adjustment, not least in the public sector.

Some improvement is also evident on the fiscal side, with around half of EU member states set to post a lower general government deficit this year than in 2009. As stimulus measures come to an end and the consolidation phase increasingly takes hold, the deficit is projected to fall in 24 member states next year. For the EU as a whole, a deficit of slightly above 5% of GDP is expected in 2011, with a further decline of about 1 percentage point in 2012 as the recovery gains ground. The debt ratio, however, is set to remain on an upward path over the forecast horizon.

Inflation remains subdued

Relatively subdued consumer-price inflation is in sight in both the EU and Eurozone over the coming period. HICP (harmonised index of consumer prices) inflation is projected to average 2% in the EU this year and next, easing to around 1¾% in 2012 (for the Eurozone, a rate of 1¾% is expected in 2011-12). The remaining slack in the economy, along with fairly moderate wage and unit-labour cost growth are expected to keep inflation in check going forward, notwithstanding slightly higher commodity prices and increases in indirect taxation and administered prices in some member states.

High uncertainty, but broadly balanced risks

With uncertainty still high, risks to the EU growth outlook are not-negligible, though they appear broadly balanced according to the Commission. On the upside, the rebalancing of GDP growth towards domestic demand, and the spill-over from the pick-up in activity in Germany to other member states, may materialise to a greater extent than currently envisaged. Policy measures to tackle high deficits and debt may also prove more effective than assumed in dissipating market concerns, as well as in boosting confidence among business and consumers.

On the downside, the financial-market situation remains a concern, with further tensions possible, as highlighted by the reappearance of stress in sovereign-bond markets lately. Moreover, softer than projected external demand cannot be ruled out, while fiscal consolidation could weigh more on domestic demand in the countries concerned than expected. Risks to the inflation outlook are also broadly balanced.

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